Deep Insights. Deep Expertise.
Balance Sheet Optimization – Aiming at a Moving Target
The Riskworx Academy recently facilitated a virtual round table on the topic of Balance Sheet Optimisation on behalf of Arise Investments. Arise is a leading African investment company that partners with sustainable locally owned financial services providers in Africa who are searching for a way to keep their independence but need financial expertise and long-term capital to prosper. The event was entitled “Balance Sheet Optimization – aiming at a moving target”, a title that encapsulates the challenges faced by modern-day banks who strive to meet the competing needs of their regulators, their clients, and their shareholders.
Although there are many definitions of Balance Sheet optimization, its most succinct summary is allocating two very scarce resources – liquidity and capital – in such a way that the bank achieves maximum return on capital, in line with regulatory requirements.
The facilitator – Illse Nell, Head of the Riskworx Academy – was joined by 3 subject matter experts who each gave a talk on different aspects of Balance Sheet Management, with the aim of boosting profitability and minimising the cost of funding, subject to the limits dictated by internal policies and regulatory requirements. After each theme, members of the 500-strong online audience were invited to participate in the round table discussions on the SME’s presentation.
The main themes discussed were:
- Demystifying the concept of balance sheet optimisation
- The regulatory aspects of Balance Sheet optimisation
- Funding and the raising of capital
- Modeling to achieve optimization
- Aligning KPIs to Balance Sheet performance.
The Riskworx Academy offers bank-specific workshops on Balance Sheet optimisation, using a world-class bank simulator that allows the bank’s team to use the composition and current positions of their own balance sheet, rather than using generic examples. The simulator is configured to reflect the bank’s local economic environment – lending rates, yield curves, market sizes, and other exogenous factors that influence the bank’s performance. Working in competing teams, participants set their own targets (NII, NPBT, RAROC, ROE, etc.) and are tasked to run their bank under strict enforcement of Basel capital & liquidity requirements, as well as the requirements of their local regulator. Originally developed for the European banking environment, an African version addresses the economic challenges faced by African banks, such as high inflation, high unemployment rates, a high percentage of non-performing loans, and the ever-increasing challenge of margin compression.