|
||||||||||||
Key to the success of this business model’s influence will be the industry’s ability to demonstrate and build confidence in its capability to maintain and control balance between trading risk and asset management. This feat is easier said than done. From now on, public companies must report their risk portfolio while demonstrating how business decisions impact their financial portfolio and how those decisions will increase earnings over time. Companies that demonstrate this complete understanding of the business and its risks will survive and ultimately prosper, as rating agencies and investors garner confidence in these companies and reward them accordingly.
The industry has demonstrated, some may say too late, its commitment to bring back investor confidence by developing best practice standards for proper risk management and strategy. For instance, the Committee of Chief Risk Officers (CCRO) published recommendations for credit risk, capital adequacy, valuation, governance, anti-trust and pricing. One of the more important suggestions on capital adequacy provides companies with a framework for conducting business and valuation.
Capital adequacy is a vital financial metric designed to assess a company's short and long term outlook for financial health. It provides organizations with both an offensive and defensive understanding of their capital resources (the balance of economic capital and financial liquidity). Capital adequacy provides a competitive advantage to those that want to better manage and understand the impact that business activities, such as large deals and mergers, have on their financial portfolio. Still, many are slow to adopt the recommendations, perhaps due to their complexity. Further, some companies seem uncertain of the extent to which they must understand their portfolio and manage it. One thing is clear: First adopters will have an immediate competitive advantage through an improved understanding of their capital portfolio—specifically their cash and risk. The technology and knowledge are now available to facilitate these metrics into the daily business routine. Dashboard technologies that sit above the existing enterprise provide the necessary framework (enterprise warehouse) to mine mission-critical risk and financial data for analysis. Once key data are centralized, additional analytics can be employed to surface key capital adequacy risk metrics (e.g., RAROC, CFaR) for measurement and simulation.
