Time Overdue for a Holistic Approach to Risk and Capital Management


The recent regulatory changes stemming from Basel (BCBS – The Basel Committee on Banking Supervision), namely IRRBB (Interest Rate Risk in the Banking Books) and FRTB (Fundamental Review of the Trading Books) have imposed quite significant challenges to banks risk and capital management practices argues Andre Horovitz, Risk specialist with over 25 years industry expertise.  

"While I do not intend here to address a comprehensive review of innovations introduced by the two regulations (to be implemented by banks by 2018 and 2019, respectively), I will try to outline a few commonalities which call for a holistic approach to both risk and capital management, and perhaps, more importantly, a seamless link to core business management strategies, discipline and processes" writes Horovitz.

The two succinct diagrams below point to the critical challenge of bridging the strategic control metrics and processes geared to supporting daily business development (mainly based on realistic but not very stressed scenarios) and capital management driven by crisis specific metrics (e.g. 97.5% ES) and crisis level stress scenarios 

Diagram 1 – IRRBB




Diagram 2 – FRTB


Complying with the above-mentioned standards is nothing but a daunting task for any modern banking institution, especially during an economic cycle dominated by very low-interest rates and low growth core businesses.

To effectively capitalise a bank under the new regime and yet conduct the profitable business in the key customer franchises, an institution needs to take a holistic approach to both risk and capital management and integrate the two into one "overarching bank management discipline".

This overarching bank management discipline needs to marry all essential elements that contribute to the bank´s functioning as a profitable and effective financial intermediator:

  • Customer Relationship and Product Pricing
  • FTP/ Effective Funding
  • Risk Management
  • Resource Management (most importantly HR)
  • IT

Traditionally,  banks were managed by "committee clusters" anchored around core activities (ALCO, NPP, Capital Management/ Basel III, Risk/ stress, etc). It is highly likely that effective banks in the near future will be called to integrate all relevant functional committees into one management committee empowered to optimise all bank processes while complying with the strategic remit and constrained by the franchise realities in which the institution operates.







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Experiential learning applied

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Advanced, complex topics explained

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Practical case-study driven workshops

Andre Horovitz has over 25 years experience in the financial services industry.

Horovitz started his banking career at Lehman Brothers as an Investment Banking Associate in 1988. He was responsible for pricing, developing hedging strategies and marketing exotic interest rate derivatives.

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