GLOBAL- There is increasing pressure from shareholders and from regulators to make sure that risk is managed and that shareholders are getting appropriate returns for their investment, said Simon Jeffreys of PricewaterhouseCoopers' global investment management team in London.
Speaking at the launch of a PWC study on ‘economic capital’ in financial institutions, he said the concept enabled a business to quantify the risks faced and to analyse unexpected losses it might experience.
“What it enables firms to do is to articulate the loss experience companies are expecting to face and linking it to the cost of capital and the pricing of the products and services being offered,” he said.
Jeffreys added: “economic capital is all about embedding these concepts into the process, making it very tangible and real in financial institutions, which are also looking at credit risk, market risk, operational risk and insurance risk.”
The benefits were safeguarding investment capital, by making sure that risks are efficiently handled. “Firms had to make sure they were not over capitalised as capital is extremely expensive. To have the wrong capital and the wrong geography is a waste of money.”
It enables people to compare investment opportunities, risk and return on a like for like basis, he said. “Where management does this well, it enhances their credibility.”
The complete study is available from the PWC website: www.pwcglobal.com/financial services.