Is There a Better Way to Fix Basel Capital Shortfalls?
Last week the Financial Times reported on strategies several high-street European banks are taking to improve their capital ratios for the coming Basel III regime. Most of the moves involve selling large amounts of assets to raise capital, but there’s another approach that is getting much less attention — improving the capital efficiency of existing loan portfolios by developing optimized strategies.
In fact, capital efficiency is an ideal application for decision optimization, as a lender can set multiple constraints and objectives. These strategies can deliver not only capital savings/efficiencies but also higher profits. This focus on strategies that improve risk management and capital management is the subject of two recent FICO Insights white papers, Where Do You Fit on the Risk/Capital Management Matrix? and Customer Decisions Can Improve Capital Management.
In the end, optimizing lending strategies is a much better long-term survival strategy than selling the family silver.