Dear,
When we say that in the new model Capital Optimization is the priority we don’t mean only for Banks, but for all economic activities. Many companies, especially big corporations, are aware of this Systemic Change, and they are developing In-House Banking programs to be aligned with the new paradigm.
We talked about it in a previous post.
http://blogs.sap.com/banking/
http://blogs.sap.com/banking/
Some years ago, SAP released the In-House Cash module, as a component of the Financial Supply Chain Management area. The solution has many advantages over other competitors, especially in integrated scenarios with other SAP ECC components (Purchasing, Sales, Treasury and Risk, Cash-Management, etc.).
Unfortunately, this is not sufficient for covering the requirements of an In-House Banking solution in the new environment of Capital scarcity. As I mentioned in the post above, in the new model, in-house banking is not only about cash-concentration or wire transfer costs reduction, it’s mainly about capital optimization.
Unfortunately, this is not sufficient for covering the requirements of an In-House Banking solution in the new environment of Capital scarcity. As I mentioned in the post above, in the new model, in-house banking is not only about cash-concentration or wire transfer costs reduction, it’s mainly about capital optimization.
For instance; two affiliates of the same multinational group can clear their Foreign Exchange exposures by signing Intra-group Forex contracts, reducing their capital consumption due to currency exchange volatility.
Fortunately, with Bank Analyzer, SAP has also developed the best piece of software for Capital Optimization, the question is, how to leverage its advantages in non-financial companies?
I’ll answer the question with one example of the Oil industry.
Some could think that a confirmed Sales Order of Crude Oil is just a logistics contract, but technically is also a Financial Transaction with the following characteristics.
Some could think that a confirmed Sales Order of Crude Oil is just a logistics contract, but technically is also a Financial Transaction with the following characteristics.
- Financial Transaction Type: Over-The-Counter Forward Contract.
- Underline: Crude Oil
- Forward Price: Confirmed Sales Price.
- Settlement Type: Physical Delivery.
- Forward Date: Invoice Date.
From a Market Risk perspective, the above forward contract represents an off-balance exposure, and consequently a capital consumption determined by the Value at Risk of the exposure, which depends on the underline price and volatility.
From a Credit Risk perspective, the confirmed sales order represents a Credit Risk exposure which also consumes capital. If the sales order is modelled as a Financial Transaction, the Credit Risk engine of Bank Analyzer can calculate the Credit Equivalent Amount of the Forward Contract. With the CEA and the Rating of the counterpart it will also calculate the Expected Loss, the Loss Given Default and the Capital consumed.
The Historical Database of Bank Analyzer and the Credit Risk module of SAP ECC offer powerful functionalities for determining the Rating of the Counterparty according to Internal and External models. We talked about it in previous posts.
The Historical Database of Bank Analyzer and the Credit Risk module of SAP ECC offer powerful functionalities for determining the Rating of the Counterparty according to Internal and External models. We talked about it in previous posts.
As you can see, representing the logistics process in Bank Analyzer gives the company executives’ visibility of the expected losses and consumed capital due to Financial Risk.
Having visibility of the Capital consumed is the first step of an efficient management of this critical resource; we’ll discuss in detail how to do it in a future post.
Looking forward to read your opinions.
K. Regards,
Ferran.
K. Regards,
Ferran.
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