The role of internal audits capital adequacy

Reinforcement of equity, without guarantee of sufficient cover

The 2020 crisis highlighted the insufficiency of capital in many banking establishments, especially in the face of a systemic storm of a magnitude rarely seen in economic history. This capitalization deficit had moreover to be compensated by the public authorities to prevent the banking sector as a whole from collapsing. To prevent again States, and therefore taxpayers, from having to put their hands in the pocket in a future crisis, regulators are now forcing banks to have higher and better capital than through the past, based on the so-called Basel 3 international agreements. Today's regulations are thus more restrictive and restrictive in prudential matters than those before the crisis. However, there are many critics against the current system, such as those considering that the regulatory obligations remain minimalist via the banks, this symbolizing the power of the banking lobby and reflecting a form of perpetual inertia which hardly agrees with lessons from the past. Would regulatory capital as it exists to date be sufficient - or not - so that banking establishments can go through a new global crisis without the public authorities being called upon? Difficult question, probably approximate answer… this symbolizing the power of the banking lobby and reflecting a form of perpetual inertia that hardly accords with the lessons of the past. Would regulatory capital as it exists today be sufficient - or not - so that banking establishments can go through a new global crisis without the public authorities being called upon? Difficult question, probably approximate answer… this symbolizing the power of the banking lobby and reflecting a form of perpetual inertia that hardly accords with the lessons of the past. Would regulatory capital as it exists to date be sufficient - or not - so that banking establishments can go through a new global crisis without the public authorities being called upon? Difficult question, probably approximate answer…

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Optimal capital management

Beyond any debate on the relevance of regulatory choices, banking establishments are required to have a precise level and quality of capital in order to cover their unexpected losses. Social capital and reserves are not only resources financing the bank's assets, but also its development. The equity belongs to the owners of the organization. As a last resort, they are used to settle the debts of the bank when it goes bankrupt.

The peculiarity of the banking sector compared to others, is to oblige its actors to cover themselves today against the losses of tomorrow if there is default in terms of liquidity and solvency. All the stake besides is there: risks ? That the regulatory level of equity increases, and that is all resources unavailable for the financing of remunerative activities. Conversely, less share capital and reserves to cover risks induces less securing of bank returns. It is therefore not only a question of complying with the law as regards the solvency ratio. The implementation of optimal capital management in order to determine the appropriate levels is also necessary.

Audit points on capital adequacy

Internal Audit and control system reviews in UAE supports the governance of its organization for the determination of an adequate level of equity. This support is reflected in the assessment of the systems deployed within the establishment in order to optimize the share capital and the reserves to respect both prudential requirements in terms of solvency and owners' expectations in terms of return on money. Invested. The main audit points are:

1. Quality of the capital invested and used to cover unexpected losses : the regulations are now more restrictive as to the recognition of capital that can be used to cover risks . This regulatory requirement is nonetheless profitable for establishments by obliging them to have the most sustainable resources available, this contributing to the sustainability of their financial equilibrium;
2. Relevance of the measurement of the risks and the jobs to be financed : the level of equity may be adequate in relation to the risk profile of the establishment provided that it paints a representative portrait of reality. Otherwise, the bank may find itself in excess or in deficit of risk coverage . The same applies to the financing of jobs with own funds. In the absence of an efficient back-to-back technique between assets and liabilities, the optimal allocation of resources, including internal ones, seems to be compromised;
3. Consistency between the strategic objectives and the level of equity : the strategy of an organization decided by governance is translated into objectives addressed to the operational departments. This variation is at the source of the risks run by the bank according to the strategic choices retained. It is therefore imperative that the budgetary exercise formalizing the objectives and responsibilities addressed to the departments integrate in a coherent manner the consumption of equity necessary to cover risks and to finance activities.

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