Capital Policy in the CCAR Framework

Lourenco Miranda

THE IMPORTANCE OF A CAPITAL POLICY

We have already established that capital planning is a key component of a sound risk management framework. It determines the level of capital held by an institution in relation to its risk profile and risk management strategy. In publicly held companies, it influences the capital distribution plan – how much of a company’s earnings can be safely distributed to the shareholders.

We can compare capital planning to building a house: it needs a solid foundation to allow your enterprise to survive both everyday risks and catastrophe, as well as comply with government requirements. As any builder knows, there is an important step you need to take before you pour your foundation, especially if you are erecting a skyscraper. You need to define the scope of your construction project. You need to know why you are building a skyscraper. You need to know who is going to use the building, and what kind of businesses you are going to attract. You need to know the general environment, such as how the building will influence the neighbourhood. These are some of the things that you need to know before you begin to draft your building plans.

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