Value optimisation in a regulatory constrained regime — A new look at risk vs return optimisation

Basel II made Pillar I's regulatory capital (RC) more risk-sensitive and brought it closer to economic capital (EC). In many financial institutions (FIs), RC is close to, or even larger than, EC. Constrained by RC, many FIs have been using RC in addition to, or as a replacement for, EC for capital allocation, performance management and even for pricing/deal acceptance to ensure a sufficient return is provided to shareholders. Although Basel …