Performance measurement and monitoring

Performance measurement and monitoring for banks and building societies

Banks have been exposed to four significant and interconnected drivers of change, including (i) a stronger integration among national financial markets, (ii) “disintermediation”, (iii) the supervisors’ growing interest in capital adequacy, and (iv) the liberalisation of international capital flows. These have strongly emphasised the relevance of risk and the ability of banks to create value for their shareholders.1

However risk management should not be seen as a way to eliminate an organisation’s exposure to risk. Quite the reverse: it should be all about exploiting risk exposures for maximum return and competitive advantage on the basis that a risky business strategy and plan should always carry the highest premium prices. In other words, the challenge is to strike the right balance between risk and reward.

In this context, financial performance measurement and risk management practices can no longer exist in a vacuum, as they are often interlinked and impact on other business lines as complexity and uncertainty increase. Traditional measures of profitability and financial performance must be adjusted for the risks inherent to the business and should be measured at various levels including organisational units, products or services, transactions and customers.

Reply helps organisations to optimise their capital structure and level of capitalisation by offering a range of approaches and optimisation procedures. These address various valid capital strategies and ensure that performance and risk measures are fully part of the shareholder-value-based management process. These can include:

  • Determining the optimal level of capital required to meet regulatory requirements, ensure solvency, maintain external ratings and improve shareholder value;
  • Defining and documenting the risk appetite, and providing a foundation for setting and allocating limits and capital; Designing, building and testing risk-based limit-setting systems, and aligning these with the strategic planning, risk and capital planning processes;
  • Integrating strategic planning, target-setting, budgeting, forecasting, and performance management/monitoring into a single process incorporating risk measures;
  • Producing integrated risk and financial reports that provide more reliable, transparent and meaningful business intelligence, supporting all levels in the organisation from transaction to portfolio level.

1 Adapted from Resti A., Sironi A, Risk Management and Shareholders’ Value in Banking: from Risk Measurement Models to Capital Allocation Policies, 2007.

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