Dear,
As the Financial Crisis and a harder regulation of the Financial System make capital scarce and expensive, efficient Capital Management is becoming the most critical activity for Banks.
From now on, there is not enough capital to finance/invest in every economic activity, prioritization is critical and only those business opportunities with higher expected profit, weighted by capital consumed, will get the necessary funds.
As expected growth of the global economy is going to be very limited in the next years, pressure on keeping good margins which can guarantee reasonable returns on capital is going to be usual. On the other hand, maintaining good margins in depressed markets will not come by the side of increasing revenues, but by the way of the efficiency and costing-control.
Costing management of a Financial Instrument is a complex activity as the main costs associated to the business process (funding costs, processing costs and risk costs) will be visible after signing the contract, in some cases long time after the event.
In production industries, most of the production costs are supported by the company before the product is sold, in fact they’re not considered cost till the product is sold (till then they just increase the value of the inventory). Cost of sales in Production or Retail industries is a deterministic and well known parameter; the equivalent in Financial Services is not.
Process, Funding and Risk costs of a Loan or a Deposit are supported during the whole life of the contract; considering that some contracts have very long maturity terms like mortgage loans, perpetual debt or shares, their estimation can be a very difficult exercise.
Determining Process costs of a Financial Instrument (or a Financial Transaction) is an internal management activity, the standard process costs of the Financial Instrument can be estimated from the Actual Costs determined by internal management accounting models (Cost Center Accounting, Activity Based Costing, Distributions, etc.). SAP has decades of experience in Internal Costing management, all this know-how is available for building complete and reconcilable models of Process Cost Accounting, from the Actual costs in ECC to the Standard costs in Bank Analyzer, and vice-versa.
Risk costs are even more challenging, as the costs associated to the possible counterpart default (credit risk costs) or changes in the interest rate o foreign exchange rate (market risk), are estimations based in purely probabilistic models. Probabilistic models which require extensive collection of external data (ratings, forex and interest rate estimations, historical and expected volatilities, etc.) and complex mathematical models.
The calculation of this probabilistic costs has to be based in assumptions (by definition, future events cannot be deterministic); the more correct and complete those assumptions are, the better cost estimation the Bank will make
Finally, effective costing control requires a seamless integration between all the components of the business process, from Transactional Banking to Analytical Banking, from collecting origination costs in CRM to communicate estimated funding costs from the Analytical Banking component.
We’ve mentioned many times that as a consequence of the Financial Crisis, efficient Capital Management is the most critical activity. But efficient Capital Management requires a holistic approach which includes cost and margin management, and this is the main competitive advantage of SAP Banking.
SAP has the most complete set of software components for building holistic and complete Product Costing models in many industries. All this knowledge is available and valid for building a complete model of Product Costing estimations in Financial Services.
Integration is the magic word, and for years SAP has been synonym of integration.
Looking forward to read your opinions.
K. Regards,
Ferran.
As the Financial Crisis and a harder regulation of the Financial System make capital scarce and expensive, efficient Capital Management is becoming the most critical activity for Banks.
From now on, there is not enough capital to finance/invest in every economic activity, prioritization is critical and only those business opportunities with higher expected profit, weighted by capital consumed, will get the necessary funds.
As expected growth of the global economy is going to be very limited in the next years, pressure on keeping good margins which can guarantee reasonable returns on capital is going to be usual. On the other hand, maintaining good margins in depressed markets will not come by the side of increasing revenues, but by the way of the efficiency and costing-control.
Costing management of a Financial Instrument is a complex activity as the main costs associated to the business process (funding costs, processing costs and risk costs) will be visible after signing the contract, in some cases long time after the event.
In production industries, most of the production costs are supported by the company before the product is sold, in fact they’re not considered cost till the product is sold (till then they just increase the value of the inventory). Cost of sales in Production or Retail industries is a deterministic and well known parameter; the equivalent in Financial Services is not.
Process, Funding and Risk costs of a Loan or a Deposit are supported during the whole life of the contract; considering that some contracts have very long maturity terms like mortgage loans, perpetual debt or shares, their estimation can be a very difficult exercise.
Determining Process costs of a Financial Instrument (or a Financial Transaction) is an internal management activity, the standard process costs of the Financial Instrument can be estimated from the Actual Costs determined by internal management accounting models (Cost Center Accounting, Activity Based Costing, Distributions, etc.). SAP has decades of experience in Internal Costing management, all this know-how is available for building complete and reconcilable models of Process Cost Accounting, from the Actual costs in ECC to the Standard costs in Bank Analyzer, and vice-versa.
Risk costs are even more challenging, as the costs associated to the possible counterpart default (credit risk costs) or changes in the interest rate o foreign exchange rate (market risk), are estimations based in purely probabilistic models. Probabilistic models which require extensive collection of external data (ratings, forex and interest rate estimations, historical and expected volatilities, etc.) and complex mathematical models.
The calculation of this probabilistic costs has to be based in assumptions (by definition, future events cannot be deterministic); the more correct and complete those assumptions are, the better cost estimation the Bank will make
Finally, effective costing control requires a seamless integration between all the components of the business process, from Transactional Banking to Analytical Banking, from collecting origination costs in CRM to communicate estimated funding costs from the Analytical Banking component.
We’ve mentioned many times that as a consequence of the Financial Crisis, efficient Capital Management is the most critical activity. But efficient Capital Management requires a holistic approach which includes cost and margin management, and this is the main competitive advantage of SAP Banking.
SAP has the most complete set of software components for building holistic and complete Product Costing models in many industries. All this knowledge is available and valid for building a complete model of Product Costing estimations in Financial Services.
Integration is the magic word, and for years SAP has been synonym of integration.
Looking forward to read your opinions.
K. Regards,
Ferran.
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