Stress Testing. What solvency is and what looks like. Chapter II.

Dear SAP Banking Community members.

On my last post, I introduced the idea of how solvency and moving towards a knowledge based economy are examples of drivers for the development of the SAP Banking Industry.

As promised, today I’ll try to explain the concept a little bit more.

When I have to explain to my students the foundation of a knowledge based economy (I’ve been teaching knowledge management for the last 11 years on the Open University of Catalonia http://www.uoc.edu) I usually give them the following example.

If I transfer a physical asset (for instance a liter of gasoline), all the value of “the gasoline” is kept on the asset, there is not value related to the agent who transferred the asset.

On the world of the ideas, this is not that easy. If my students don’t have a minimal level of trust on me, and we also have a reasonable good relationship, the transfer of knowledge/information is impossible (that’s what specialists on knowledge management call “Social Capital”).

But let’s go back to the issue of the solvency of the European Banks; for them it’s not enough to have solvency (technically, enough capital for hedging its Operational/Credit/Market Risk). They also need to transfer the information that they are solvent to the market (investors/people), and they will be able of doing it, only if they can get the necessary level of trust (of course they also need to have solvency, but that’s not enough). There is no information transferred if it’s not “accepted” by the receiver.

I remember a conversation with a colleague about Bank Analyzer some months ago, in my opinion the greatest piece of software developed by SAP. He told me that for some potential clients it was hard to make the investment of implementing Bank Analyzer because it was “cheaper” to have several MBA’s preparing the solvency reports on excel spreadsheets.

What is the difference? The difference is how knowledge transfer works.

The value of the solvency of the Bank depends on the capacity of transferring this information to the investors.

Assuming that the MBA’s could generate the same data for proving Bank’s solvency, they will never be able to provide the reporting and disclosure capabilities of an integrated system like Bank Analyzer. So the capacity of transferring the intangible asset (solvency) is totally different and also its value (capacity of getting financing without paying a high premium).

In the case of the gasoline, if two bottles of gasoline are technically identical, they have the same value, that’s not the case in the economy of the ideas.

Looking forward to read your comments.

Kindest Regards.

Ferran.