Going Advanced: Improving Accuracy of Risk Weighted Assets and Driving Capital Efficiency in Brazil

Brazil’s robust banking system has been and remains a key strength for the country. To date, regulatory capital has not been a major constraint for the largest players. Banks pursued double-digit growth and supported robust returns allowing them to cover losses incurred and generate sufficient capital through retained earnings to sustain future growth and reward shareholders. Hence, over the past years, banks have focused on enabling the front-office, through growth strategies, optimization of channel management and more robust underwriting and fraud detection, rather than strategic capital and risk management initiatives, such as capital efficiency improvement, stress testing, scenario planning and management of distressed debt.

As Brazilian banks enter a more challenging market and regulatory environment, there is an opportunity to make changes in the sophistication of risk and capital management capabilities to meet regulatory requirements, sustain returns, and enable sustainable lending to customers. In our view, this will be an increasingly important strategic issue for senior management and the board over the coming years and one that banks should be planning for now.