Managing risk and capital networking breakfast

During the breakfast session, Tom Wilson will stimulate a on the link between risk, capital and value management leveraging insights from his recent book, Value and Capital Management: A Handbook for the Finance and Risk Functions of Financial Institutions.  

Creating value is challenging in any highly competitive industry, a daily battle to capture market share, defend margins and improve expenses.  Managing value in financial services is even more challenging due to the unique role that risk and capital play in the economics of the business: whereas most industrial corporations actively avoid risk, there can be no return to shareholders – and no satisfied customers – if banks and insurers avoid risk, and taking risks requires capital. In banking and insurance, risk and capital management and value management are synonymous.

The role of the Chief Financial Officer (CFO) and Chief Risk Officer (CRO) has evolved and adapted to this economic reality. Modern finance and risk functions now have substantial influence on the strategy, operations and, ultimately, the value of their firms. This influence comes in part from being a business partner and in part through the financial and risk management activities directly within their responsibility.

Managing risk and capital is made more important in a global environment characterized by low growth, rates and risk premia;   volatile capital markets characterized by periods asset bubbles and sudden loss of investor confidence; more volatile, risk-based capital regimes; and, finally, increased shareholder demands regarding the use and remuneration of capital. Against this background, managing risk, capital and, ultimately, value under these conditions requires skills in three key areas.

• Better information – Measuring value. What gets measured, gets managed. Accurately measuring value is a necessary precondition for managing it. This section develops a risk-adjusted valuation and performance measurement framework tailored to banks and insurers, reconciled with the way that our shares are actually valued by the market. The framework should clearly link management actions to shareholder value creation and is the foundation for internal, value-based management initiatives.
• Better insights – Managing value. Better information may be a necessary condition, but it is not a sufficient condition: ultimately, the “right” decisions have to be taken. Allocating capital to existing businesses and exploiting new growth opportunities requires insights beyond risk and capital; it also requires an understanding of the markets, the drivers of operating performance and the sources of profitable growth. This requires corporate and segment-specific “rules of the game” (or strategies) as well as Key Performance Indicators (KPIs) tailored to insurance.
• Better decisions – Capital, balance sheet and risk management. In addition, CFOs and CROs contribute directly to value creation through their own areas of responsibility, especially through strategic planning and capital allocation; balance sheet, liquidity and asset/liability management; risk underwriting and risk management.