Capital Optimisation and Business-mix Management

Bogie Ozdemir

Before the 2007–08 financial crisis, financial institutions were income-driven and capital was not a binding constraint. Since then, FIs have still been income-driven but capital has become very much a binding constraint, primarily due to the implementation of Basel III and IV, under which available capital is going down while the risk capital is going up. Returns on equity have already gone down significantly, and are likely to decrease further in accordance with increasing capital levels. In this environment, many FIs feel that they have got caught with a suboptimal business mix that they need to “correct” while meeting their income targets. Many FIs have business and strategic planning processes that do not facilitate the optimal capital utilisation and business-mix management required to improve ROE.

In this chapter, we will talk about capital and business-mix management. We use capital and business-mix management analogously to refer to maximising ROE via more effective capital utilisation, and selection of business and product mixes. We will show how to design a comprehensive and integrated business and strategic planning process to move towards an optimal business mix with