Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition

Economic capital

The above loan pricing example has shown that a margin of 1.2% was necessary to offer an acceptable return to shareholders. But any corporate banker working in an international environment will tell you that intense competition between banks has driven margins down to 30 basis points (0.3%) in some countries.

Given the need to satisfy shareholders, banks have analysed the strategic implications of the BIS 8% capital regulation. Three comments are frequently heard.

1. The above analysis is not comprehensive because the loan pricing example only took into account the loan transaction. Quite often, banks will sell additional services (cash management, foreign exchange, etc.) so that the margin could be lower if other sources of revenue ...