Capital Management

Ralf Leiber

Capital management is a core activity of bank management. Its primary objective is to balance the supply of capital with the demand for it. In doing so, the interests and requirements of key stakeholders, most notably equity and debt investors, clients, analysts and the bank’s supervisors and management, must be considered. The demand for capital arises as banks’ business activities entail risks that need to be adequately covered to ensure that potential losses can be absorbed both in the ordinary course of business and under stress. Ultimately, the level of capital held needs to address all stakeholder requirements while permitting an adequate return on capital.

Capital management needs to operate as an advisor to bank management for day-to-day business decision-making and execution as well as planning and strategy formulation, ensuring that sufficient capital is available at all times, that it is invested wisely and that adequate returns are provided. Furthermore, from an asset and liability management (ALM) perspective, capital and capital instruments are valuable sources of long-term funding.

Multiple definitions of capital are used in bank management, ranging from the