Dear
As you probably know, one of the major exponents of the current debt bubble and responsible of the 2008 Financial Crash are the Over the Counter Derivatives.
These Financial Contracts are just bets on the fluctuation of a Financial Parameter, called underline (Stock Market Indexes, Foreign Exchange Rates, Interest rates, Commodities Prices, etc.).
Over the Counter Derivatives were responsible of one of the worst moments of the 2008 Financial Crisis when on September the United States Federal Reserve Bank injected 85 billion USD to prevent the AIG’s collapse. This is the largest government bailout of a private company in U.S. history.
Just for giving you an idea of the size of the OTC Derivatives bubble, according to the estimations of the Bank for International Settlements (Central Bank of the Central Banks), the OTC derivatives market has a nominal size of more than 600 trillion USD, approximately 10 times the world’s GDP.
The danger of this bubble is very well known; for instance, on 2002 Warren Buffett called them “Financial Weapons of mass destruction”.
On the 2009 summit in Pittsburgh, G20 leaders agreed the regulation of the OTC derivatives market.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=auIe3UTJncpY
Unfortunately, today's situation is not much better than in 2008, the destructive capacity of the derivatives market is even bigger than it was at the time, and the everyday closer rising of the interest rates has the capacity of bursting the bubble.
On a recent speech, Mr. Stephen G Cecchetti, Head of the Monetary and Economic Department of the Bank for International Settlements advocated for the regulation of the OTC derivatives market.
http://www.bis.org/speeches/sp130912.pdf
He also mentions the concerns among the banking community about the collateral restrictions generated by the implementation of the regulation.
This is a wrong perception, collateral scarcity is not a consequence of the regulation; it just makes it visible. The chain of events is as it follows.
1) Growth rates are going to be lower due to natural resources scarcity and global debt.
2) Low growth rates produce capital scarcity.
3) Capital scarcity requires managing it efficiently.
4) Stringent regulation and higher collateral requirements reduce free capital available to invest, and drives efficient Capital Management.
Don’t forget that collateral is just a form of capital, and efficient capital management requires efficient collateral management.
In the meantime, the most urgent concern is deflating the derivatives bubble before it bursts. As you could see in the last weeks, keeping the interest rates low is more difficult every day, and rising interest rates are one of the most dangerous scenarios for debt bubbles, including derivatives bubbles (which are just another form of debt).
For giving some hints of the magnitude of the problem, consider this.
On 1929 Financial Crisis which triggered the great depression there was no such thing as derivatives, just debt and stocks.
The total value of the United States stock market is estimated at 23 trillion USD, while US banks have exposures in derivatives markets by 223 trillion USD
http://www.forbes.com/sites/halahtouryalai/2013/03/28/risk-is-back-americas-big-banks-are-knee-deep-in-derivatives/
When the new deal bailed out the US economy, the national debt was only 16% of the annual GDP while today is over 100% of annual GDP.
The only option is Efficient Capital management and efficient collateral management is one of its components.
During this month I’m going to focus on the SAP Banking capabilities for efficient collateral management, I hope this post gives an idea of the necessity of making it happen.
Looking forward to read your opinions.
K. Regards,
Ferran.
As you probably know, one of the major exponents of the current debt bubble and responsible of the 2008 Financial Crash are the Over the Counter Derivatives.
These Financial Contracts are just bets on the fluctuation of a Financial Parameter, called underline (Stock Market Indexes, Foreign Exchange Rates, Interest rates, Commodities Prices, etc.).
Over the Counter Derivatives were responsible of one of the worst moments of the 2008 Financial Crisis when on September the United States Federal Reserve Bank injected 85 billion USD to prevent the AIG’s collapse. This is the largest government bailout of a private company in U.S. history.
Just for giving you an idea of the size of the OTC Derivatives bubble, according to the estimations of the Bank for International Settlements (Central Bank of the Central Banks), the OTC derivatives market has a nominal size of more than 600 trillion USD, approximately 10 times the world’s GDP.
The danger of this bubble is very well known; for instance, on 2002 Warren Buffett called them “Financial Weapons of mass destruction”.
On the 2009 summit in Pittsburgh, G20 leaders agreed the regulation of the OTC derivatives market.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=auIe3UTJncpY
Unfortunately, today's situation is not much better than in 2008, the destructive capacity of the derivatives market is even bigger than it was at the time, and the everyday closer rising of the interest rates has the capacity of bursting the bubble.
On a recent speech, Mr. Stephen G Cecchetti, Head of the Monetary and Economic Department of the Bank for International Settlements advocated for the regulation of the OTC derivatives market.
http://www.bis.org/speeches/sp130912.pdf
He also mentions the concerns among the banking community about the collateral restrictions generated by the implementation of the regulation.
This is a wrong perception, collateral scarcity is not a consequence of the regulation; it just makes it visible. The chain of events is as it follows.
1) Growth rates are going to be lower due to natural resources scarcity and global debt.
2) Low growth rates produce capital scarcity.
3) Capital scarcity requires managing it efficiently.
4) Stringent regulation and higher collateral requirements reduce free capital available to invest, and drives efficient Capital Management.
Don’t forget that collateral is just a form of capital, and efficient capital management requires efficient collateral management.
In the meantime, the most urgent concern is deflating the derivatives bubble before it bursts. As you could see in the last weeks, keeping the interest rates low is more difficult every day, and rising interest rates are one of the most dangerous scenarios for debt bubbles, including derivatives bubbles (which are just another form of debt).
For giving some hints of the magnitude of the problem, consider this.
On 1929 Financial Crisis which triggered the great depression there was no such thing as derivatives, just debt and stocks.
The total value of the United States stock market is estimated at 23 trillion USD, while US banks have exposures in derivatives markets by 223 trillion USD
http://www.forbes.com/sites/halahtouryalai/2013/03/28/risk-is-back-americas-big-banks-are-knee-deep-in-derivatives/
When the new deal bailed out the US economy, the national debt was only 16% of the annual GDP while today is over 100% of annual GDP.
The only option is Efficient Capital management and efficient collateral management is one of its components.
During this month I’m going to focus on the SAP Banking capabilities for efficient collateral management, I hope this post gives an idea of the necessity of making it happen.
Looking forward to read your opinions.
K. Regards,
Ferran.
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