Maintaining compliance while still holding capital

August 11, 2016 Uncategorized
How do banks price quickly while still holding capital?

When making key financial and lending decisions, it's necessary to strike a balance between establishing prices quickly in order to take advantage of market openings and being so diligent that deals run the risk of being lost. According to CNBC, the standard leverage limit set for all banks is 3 percent, meaning these companies need to maintain Tier 1 capital that equals out to that amount. Financial services organizations need a way to make sure they're finding that balance while at the same time maintaining compliance with strict financial regulations.

The question remains: How do banks marry diligence with quick pricing, while at the same time ensuring they're still holding capital at the end of the day?

"Banks have to make sure they're dotting their I's and crossing their T's when it comes to maintaining compliance."

Price quickly, but don't neglect consistency

The benefits of quick and consistent pricing are clear. Former U.S. Treasury Secretary Timothy Geithner said in 2009 that maintaining capital is the key to preventing financial crises, and quickly taking advantage of openings in the market when loan pricing is one way to accomplish this.

"Capital sets the amount of risk you can take overall," Geithner said. "Capital assures you have big enough cushions to absorb extreme shocks."

In order to retain the minimum amount of capital required by current regulations, banks have to be cognizant of risks. 

Having consistent practices when it comes to pricing is critical, as well, and for reasons other than regulatory compliance. Consistency in pricing is key when it comes to customer satisfaction, and especially in today's financial climate, it's important to make sure customers are happy. Research conducted by McKinsey noted that customer satisfaction depends on a number of factors, but consistency is one of the most important.

"In a world where research suggests that fewer than 30 percent of customers trust most major financial brands, ensuring consistency on customer journeys to build trust is important for long-term growth," the McKinsey report stressed.

Consistency, therefore, is the key ingredient. Once consistency becomes discipline, this process evolves into increased margins across the board for banks. In the meantime, organizations still need to comply with the strict regulations present in the financial services industry. In the post-2008 financial crisis era, these rules have never been more stringent, so banks have to make sure they're dotting their I's and crossing their T's when it comes to maintaining compliance. Bloomberg contributors Piotr Kamanski and Kate Robu noted earlier this year that in order to make risk and internal control frameworks more effective and sustainable, banks will have to reassess some of their compliance processes.

Consistency is key in loan pricing when it comes to keeping customers satisfied.Consistency is key in loan pricing when it comes to keeping customers satisfied.

Maintain compliance and improve operations

In taking advantage of market openings, banks have the opportunity to optimize capital while loan pricing accurately and effectively. But in order to improve operational performance and keep capital levels where they need to be, banks need an optimal risk management solution.

Kamanski and Robu stressed that a successful compliance system – one that supports consistent pricing strategies and thus helps banks stay within the capital requirements – depends on being able to measure progress and creating an integrated view of all the possible risks. In order to create a strategy that encompasses compliance and operational quality, along with fast, consistent pricing, organizations need a risk-based pricing and customer profitability forecasting solution like DealPoint from Brilliance Financial.

This web-based software platform allows relationship managers and portfolio managers to manage risk and quickly analyze market indicators in order to take advantage of openings as they price their loans while still being cognizant of how much capital they are holding. DealPoint uses quantitative metrics and markers to help banks measure compliance and keep capital, so banks can price consistently – and diligently – while staying within the parameters of the financial regulations.

For more information, contact Brilliance today.