True Economic Capital Allocation

Financial institutions are required to set equity capital based on the unexpected losses that exceed their expected loss provisions. When actual losses exceed the Allowance for Loan & Lease Loss (ALLL) provisions, the equity capital of the institution is eroded.

Yet most institutions continue to only set aside the minimum regulatory requirements of capital, while some larger firms estimate their capital needs using simulation approaches that utilize external data.

True economic capital allocation should be based on the volatility of expected future losses of the institution's own portfolio of loan exposures and not rely on external portfolio proxies. PortfolioView™ measures the volatility of expected losses by deriving both expected and unexpected loss estimates for the banking book as part of a single integrated analysis of internal loan data.

Our computations of economic capital are more appropriate measures than arbitrary regulatory requirements as PortfolioView™ takes account of obligors' credit quality, cash payments, cash draws, write downs, and recoveries with the added benefits of potential diversification across portfolios and geographies. This measure is also more accurate than the simulation approaches that use external market proxies as inputs for internal, non-traded private exposures.

Using PortfolioView™, management is enabled to concentrate on the policy aspects of capital allocation rather than the details or complexity of its estimation. True economic capital can be allocated to the entire portfolio or any segment ranging from individual transactions to entire business lines.

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