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Sun Life Building, downtown Montreal. (Christinne Muschi for The Globe and Mail)
Sun Life Building, downtown Montreal. (Christinne Muschi for The Globe and Mail)

Capital is king in this tightly regulated world Add to ...

Even if financial institutions don’t like it, they’re learning to accept that capital is king in a world where regulators are so willing to crack their whip.

Sun Life Financial Inc. is the latest firm to take action. On Monday the life insurer announced a strategic overhaul that will see it halt sales of variable annuity and individual life products in the U.S.

The decision is largely based on capital allocation. In its announcement, Sun Life pointed out that it now has an “intensified focus on reducing volatility and improving the return on shareholders' equity by shifting capital to businesses with superior growth, risk and return characteristics.”

The Globe’s Tara Perkins also points out this morning that global regulators have been looking at higher capital requirements for the industry.

Capital isn’t the sexiest topic for investors, because it’s not easy to directly trace how re-allocating it beefs up the bottom line of the income statement. But it has become an incredibly important discussion in the industry and is on the top of management teams' minds.

Take the investment banks, for instance. Over the past two years, wealth management has become an extremely hot business unit because it isn’t capital intensive. Managing money provides fee-based revenues, and that gave the banks a lot of comfort at a time when Basel III was still being worked out.

Then there is the issue of new U.S. bank stress tests, through which the Federal Reserve will model different banks’ performance under different economic scenarios. The main purpose of these tests is to assess if these institutions -- including both Royal Bank of Canada and Bank of Montreal -- are adequately capitalized.

At this point, you’re probably tired of hearing terms like Tier 1 capital and MCCSR -- minimum continuing capital and surplus requirements -- but in all likelihood, they’re going to be thrown around a lot more in 2012.

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