4.7 Assessing business model viability

Having conducted the analyses covered in Sections 4.4 and 4.5, competent authorities should form, or update, their view on the viability of the investment firm’s current business model on the basis of its ability to generate acceptable returns over the following 12 months, given its quantitative performance, key success drivers and dependencies and business environment.

Competent authorities may assess the level of returns against the following criteria:

• a. return on equity (ROE) against cost of equity (COE) or equivalent measure: competent authorities may consider whether the business model generates a return above cost (excluding one-offs) on the basis of ROE against COE; other metrics, such as return on assets or risk-adjusted return on capital, as well as considering changes in these measures through the cycle, may also support this assessment;
• b. cash-flow structure: competent authorities may consider whether the cash-flow mix is appropriate to the business model and to the strategy; volatility or mismatches in the cash-flow generation may mean that a business model or strategy, even one that generates returns above costs, may not be viable or sustainable given the current or future business environment; and
• c. risk appetite: competent authorities may consider whether the investment firm’s business model or strategy relies on a risk appetite, for individual risks or more generally, that is considered high or is an outlier amongst the peer group, where available.