Balance sheet optimisation while complying with regulatory mandates

Taudi, Reetsang
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The 2008 global financial crisis revealed weaknesses in the banking system and existing regulations such as Basel II. The aftermath of the financial crisis resulted in fundamental review and introduction of key regulations and standards such as the Basel III and IFRS 9. Basel III which was aimed at strengthening the regulatory capital framework as well as strengthen soundness of banks by introducing liquidity standards. The IFRS 9 was introduced by accounting standards setters aimed at early recognition of impairments with forward-looking estimated lifetime expected losses. The authors acknowledge the benefits of Basel III and IFRS 9 in reducing risk within financial institutions, however financial institutions will have to balance shareholder’s demands and expectations with regulatory requirements and standards hence driving banks to find a good balance between profitability and regulatory constraints. Therefore banks have to reassess their approach and have a strategy and financial management structure to obtain the optimal balance sheet mix which maximizes shareholder value creation whilst remaining within the regulatory constraints. The results of the study shows that the optimization model formulated by the authors can can be used by commercial banks as a key input to their decision making process in order to optimize bank’s shareholder value whilst remaining in compliance with the new regulatory reforms. This study is important as it will assist banks to understand the impact of management financial decisions to their financial position and perfomance in a simple model. Further, it will assist with balance sheet strategies that banks could adopt to maximize financial perfomance while remaining in compliance with regulatory reforms.
A research submitted in fulfilment of the requirements for the degree of Masters of Management in Finance and Investment (MMFI) to the Faculty of Commerce, Law and Management, Wits Business School, University of the Witwatersrand, Johannesburg, 2020
Balance sheet, IFRS 9, Basel III