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Banks’ internal capital markets: how do banks allocate capital internally?

Author

Listed:
  • Bajaj , Rasna

    (Bank of England)

  • Binmore, Andrew

    (Bank of England)

  • Dasgupta, Rupak

    (Bank of England)

  • Vo, Quynh-Anh

    (Bank of England)

Abstract

Banks allocate capital to their business lines to assess those lines’ relative performance, which informs their strategic decisions. Capital allocation, together with Fund Transfer Pricing (FTP), are two important internal processes used by banks to support business optimisation decisions. This article discusses the range of methods that banks use to allocate equity capital to their business lines, drawing on reviews conducted by the Prudential Regulation Authority (PRA). It complements a previous Quarterly Bulletin article which describes banks’ FTP practices. We also discuss in this article potential implications of capital allocation methods for banks and prudential regulation.

Suggested Citation

  • Bajaj , Rasna & Binmore, Andrew & Dasgupta, Rupak & Vo, Quynh-Anh, 2018. "Banks’ internal capital markets: how do banks allocate capital internally?," Bank of England Quarterly Bulletin, Bank of England, vol. 58(2), pages 1-10.
    • Handle: RePEc:boe:qbullt:0238
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    File URL: https://www.bankofengland.co.uk/quarterly-bulletin/2018/2018-q2/banks-internal-capital-markets-how-do-banks-allocate-capital-internally
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    Cited by:

    1. Coen, Jamie & Coen, Patrick, 2022. "A structural model of liquidity in over‑the‑counter markets," Bank of England working papers 979, Bank of England.
    2. Stuart M. Turnbull, 2018. "Capital Allocation in Decentralized Businesses," JRFM, MDPI, vol. 11(4), pages 1-11, November.
    3. Stijn Claessens, 2019. "Fragmentation in global financial markets: good or bad for financial stability?," BIS Working Papers 815, Bank for International Settlements.
    4. Belinda Cheung & Sebastien Printant, 2019. "Australian Money Market Divergence: Arbitrage Opportunity or Illusion?," RBA Research Discussion Papers rdp2019-09, Reserve Bank of Australia.
    5. Neamtu, Ioana & Vo, Quynh-Anh, 2021. "Capital allocation, the leverage ratio requirement," Bank of England working papers 956, Bank of England.

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