Dear,
Last week we briefly talked about the Comprehensive Capital Assessment Reviews that FED is running in the US banks, and ECB is running in the European Banks.
We also looked at the Integrated Financial and Risk Architecture of Bank Analyzer and how it can play a very important role in them, as a central repository of the credit risk exposures of a Bank.
As you probably know, the Integrated Financial and Risk Architecture provides an integrated framework to manage the Accounting and Solvency requirements of banks.
This integrated framework of Accounting and Solvency is not just an elegant architecture, or a nice to have value proposition; it’s the foundation of any holistic capital optimization model.
The Basel agreement recognizes explicitly the value of this integrated vision; but in general, this not very well known by the implementation partners and consultants, and what is worse, by our potential clients.
This is an improvement opportunity; if we succeed in translating properly the technical advantages of Bank Analyzer as value propositions for regulatory fulfillment and capital requirements optimization, we’ll increase the chances of Bank Analyzer being chosen in front other competitors.
Capital Assessment Reviews’ objective is demonstrating that the bank has enough capital to absorb the potential losses, protecting the bank’s depositors and economics stability.
The Basel agreement determines potential losses of the Bank’s portfolio from the Value at Risk for a certain confidence level. The Value at Risk is divided in two statistical areas, called Expected Losses and Unexpected Losses.
Capital Optimization requires developing an statistically valid, risk management model, capable of reducing the Expected and Unexpected losses of the bank’s portfolio.
Expected Losses must be covered by Accounting Provisions and Unexpected Losses must be covered by capital, determined from the Risk Weighted Assets calculation.
Additionally, the International Financial Reporting Standards specify how banks must calculate their impairment accounting provisions.
And finally, the Basel agreement specifies that any shortfall in the accounting provisions for covering expected losses should be deducted equally from Tier 1 and Tier 2 capital and any excess on the accounting provisions will be eligible for inclusion in Tier 2 capital.
The Basel agreement is telling us in the above paragraph that there’s a deep link between Accounting provisions and Risk Weighted Assets calculation, in order to determine the Bank’s capital requirements.
Consequently, developing a complete optimizing model of the bank’s capital requirements requires a holistic accounting and risk management vision, precisely what the Integrated Financial and Risk Architecture of Bank Analyzer proposes.
Let me end this post with an analogy, efficiency was not a concern for automotive industry while Oil was abundant and cheap. As Oil becomes scarce and prices raise, drivers demand efficient and hybrid cars. Cars manufacturers which have the answer to that market demand are transforming the automotive industry.
After the financial crisis, fulfilling the regulation and reducing the capital requirements is a priority for banks’ executives.
SAP has the business value proposition to answer this requirement and transform the industry, and it will do it; we just have to improve the way we communicate this value proposition.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
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