The recent financial crisis, increased regulatory requirements and a continued weak economy have put banking RoEs under extreme pressure. As banks search for ways to improve returns, a key component of efforts is to manage risk-weighted assets (RWA) more efficiently.
We see three key categories of initiatives:
1) Technical: improvements to models, data and infrastructure to allow more precise risk measures
2) Tactical: hedging and changes to contract terms that achieve business objectives with lower risks
3) Strategic: reconsidering activities that drive up risk-weighted assets without a commensurate return
These initiatives should also be supported by improvements in reporting and analytics, and by strong governance.
While these principles apply to all major banks, specific challenges differ. These two companion papers apply this framework to different sources of risk:
- Market and counterparty credit risks
- Traditional credit risk for commercial and retail banks
