Banking and Trading. Bank Analyzer for Non-Financial Companies - Chapter II

Dear,
Last week I received the feed-back of some readers to the post “Bank Analyzer for Non-Financial Companies - Chapter I.”; thanks for that, I really appreciate.

http://sapbank.blogspot.com/2014/01/bank-analyzer-for-non-financial.html

In their emails, most of them expressed doubts about the incentives for a Non-Financial Company implementing Bank Analyzer.

As I commented in my answers, there’re two reasons for a company, Financial or Non-Financial to implement Bank Analyzer.

- Capital Optimization/Risk Management.

- Regulatory Compliance.

I’ll focus today in the Regulatory Compliance.

It’s true that the regulatory framework for Banks is harder than for non-financial companies, but as you probably know, the new Dodd-Frank regulation on Over-The-Counter derivatives trading also applies to Non-Financial companies. For instance, Oil & Gas companies, in which derivatives’ trading is an intrinsic part of their business, are subject to this regulation.

http://www.ey.com/US/en/Industries/Oil---Gas/Dodd-Frank--what-oil-and-gas-companies-need-to-know

But we’re just at the beginning of the Systemic Change, and regulation will change to drive the economy towards the new Capital efficiency paradigm.

A good example is the US Congress “concern” about the involvement of investment banks, like Goldman Sachs or Morgan Stanley, in the commodity trading, which are posing at risk the stability of the financial system.

http://www.reuters.com/article/2014/01/15/us-commodities-banks-senate-idUSBREA0E07Q20140115

http://www.bloomberg.com/news/2014-01-13/fed-said-to-release-plan-to-limit-banks-commodities-activities.html

http://www.nytimes.com/2014/01/16/business/lawmakers-to-press-for-tighter-rules-on-physical-commodities.html?_r=0

Commodity trading is a core activity of investment banks, limiting their involvement in the commodity trading business means two things.

- Reducing their opportunities to do business.

- Eliminating risky (capital consuming) assets from their balance sheet.

Is this not a symptom of the systemic change of the financial system I’ve been describing you for the last 5 years, from a Business model based in volume to a business model based in efficient Capital management?

Additionally, “Lawmakers are saying that dealing in commodities could create conflicts of interest and lead to market manipulation by deposit-taking institutions”, and this is bad.

And the question is, why this was good 20 years ago, when Glass–Steagall Act, which assured the separation between commercial and investing banking, was repealed?

At the time, we were said that regulation limited the growth potential of the economy. Is it ok limiting the growth potential of the economy today?

You know my opinion, speculation is not good or bad, it’s just the consequence of an economic model based in capital consumption.

http://blogs.sap.com/banking/2011/11/16/the-financial-system-speculators-and-the-recession-dream/

In the old model, wasting capital was not an issue as it was abundant, not anymore.

The legislator is telling us today that in the new model is not convenient that banks are involved in commodity trading, and they prefer this activity to be performed by the natural market agent; Oil, Gas, Mining, Companies, etc.

If so, shouldn't we, as SAP consultants, look at those companies and analyzing integrated scenarios for managing their “banking” business processes?

I’m doing it already and I’ll share my findings with you in future posts, I hope you enjoy them.

Looking forward to read your opinions.
K. Regards,
Ferran.