Fishing for Capital? Need More Bait?

The UK’s Financial Policy Committee has been telling banks to amass more capital. That’s no surprise, but the same committee has now determined that banks probably can’t raise enough capital by doing things like holding onto earnings and stopping big bonuses. Furthermore, banks are having a tough time getting money from the stock markets because investors think they’re just not profitable enough these days.

What is a capital-strapped high-street bank to do? As I noted in a recent post, one of bank’s capital management strategies should involve optimization of lending decisions. This is a way to both generate organic capital and reduce capital requirements by balancing reward with risk. This hits both sides of the capital equation. Another good strategy is to focus customer relationship efforts on increasing deposits. FICO has developed analytics that can help banks do just this.

Will this solve all of a bank’s capital problems? Clearly not. But any one channel is limited — as the UK committee has concluded — so even with the tantalizing promise of relaxed regulatory requirements on capital, banks really should consider every valid means to hitting their capital targets.