Capital Planning

Capital planning is a critically important activity for a bank, credit union or financial institution. It should be an important follow on activity to your annual strategic planning process. With the regulatory emphasis on capital levels over the past years, your local marketplace changing, economic cycles continuing to be a reality and, now, the impact of the COVID-19 pandemic, there should be a continuing process to assess and understand your intermediate and long term capital requirements.

If there is other information desired, please contact BankingStrategist.

PLANNING process

Your capital planning process should be a key step following your strategic planning process and ahead of your annual budgeting or operating plan process.

Capital planning should be performed annually. Late summer may be a key time to consider carrying out this process.

The starting point needs to be the baseline planning scenario created in your most recent strategic planning update.

This will provide an initial view of your financial position over the next five years. How does your balance sheet change given your assumptions on business growth (or decline). What are your capital ratios and do these meet the Basel III regulatory requirements and your bank capital policy targets? Are you building capital or are you in need of capital? What is impact on shareholder dividends?

As part of this process, you should evaluate any potential changes to your balance sheet and the impact on profitability and capital adequacy.

You should identify any key risks associated with your Capital Plan and determine how to mitigate those risks.

KEYS FOR SUCCESS:

Your baseline planning scenario should be your view of "most likely" operating environment.
Your financial forecast modeling needs to be accurate based upon your current assumptions; but it is directional only for planning purposes. It does need to be your most realistic view of the next five years.
View alternative scenarios - recessionary or optimistic - to understand impact on your capital planning.
Be prepared annually to update and revisit - and to make course corrections as appropriate.
Have fun!

Planning documents

All banks, credit unions and financial institutions should have a written capital policies and capital plan. And this capital plan should be tied to your strategic plan to show how you will have the capital to support your business over the next five years or more.

Key elements to include in your capital plan are:

Summary of your business strategy;
Narrative on the business, local market and economic scenario for your next five years;
Financial forecast for minimum of five years;
Analysis of the balance sheet and profitability;
Assessment of key risks and uncertainties, including credit, interest rate, liquidity, price, operational, compliance, strategic, and reputation;
Summary of key capital policies, including dividends and capital adequacy.

KEYS FOR SUCCESS:

Make your Capital Plan readable and actionable.
Your financial forecast should contain sufficient detail to observe the link to your business activity.
Document your key assumptions underlying your baseline planning scenario.
Prepare a rigorous assessment of key risks that will be encountered and impact on capital adequacy.
Validate compliance with your capital planning policies and regulations.
Establish strong management and board governance and oversight.