FinPro’s capital planning process interactively helps management and the Board to determine the appropriate levels of capital for the organization. The process not only evaluates the Bank at its current position, but evaluates the future capital needs of the Bank based upon the Bank’s individual strategic plan and inherent risks.
IDENTIFYING & EVALUATING RISKS
The first component of capital planning is to identify and evaluate all material risks.
- Conduct a situation assessment of the Bank which includes a review of recent historical growth, expected growth, recent financial performance, and overall potential utilization of and need for capital;
- Identify the largest areas of risk associated with the Bank’s capital and rank these risks as low, moderate, or high risk;
- Determine appropriate vertical and horizontal stress tests for each risk identified; and
- Illustrate the impact of these stress tests through forward looking financial modeling of each scenario.
SETTING & ASSESSING CAPITAL ADEQUACY GOALS
The second component of effective capital planning is to determine the bank’s capital needs in relation to the material risks
- Determine the appropriate ratios to measure capital;
- Identify bank specific trigger points for each ratio;
- Set appropriate thresholds to delineate low, moderate, and high risk for each ratio; and
- Overlay the results of the forward looking projections and stress tests to determine the capital adequacy at any given point in the future.
MAINTAINING A STRATEGY TO ENSURE CAPITAL ADEQUACY & CONTINGENCY PLANNING
The third component of effective capital planning is to have a strategy to maintain capital adequacy and build capital, if needed.
- Identify mitigation strategies for the high risk areas and/or those stress tests that drop the ratios near into the moderate to high risk areas;
- Establish timelines for specific mitigation strategies depending upon the level of risk or the likelihood of the stressed event; and
- Plan for contingencies and build a decision tree.
ENSURING INTEGRITY IN THE CAPITAL PLANNING PROCESS & CAPITAL ADEQUACY ASSESSMENTS
The final component of effective capital planning is to ensure integrity, objectivity and consistency of the process:
- Ensure that the Bank’s current policy meet current best practices and appropriately documents the process the Bank conducts;
- Conduct ongoing capital planning; and
- Ensure Board and senior management involvement.