Wednesday, September 5, 2012
You can leave your hat on.
Dear,
On 1986 Kim Basinger and Mickey Rourke starred a film which was going to break myths and be remembered for years; Nine 1/2 Weeks http://www.imdb.com/title/tt0091635/.
Starting September we’re going to see a movie which is also going to break myths and be remembered for years. Myths always need time for being broken, and they’re remembered for years.
4 years ago we saw the Financial Crisis starting with Lehmans Brothers bankruptcy and the biggest Banking bail out of the history. Since then we’ve seen how the world’s economy has lightly improved for a short period and severely deteriorated a few months later.
Once and again we’ve seen how a bailout of a problematic country in Europe (Greece, Portugal, Ireland, Spain), or a Quantitative Easing in US was going to solve the problem and some months later we saw an economic relapse.
After every cycle the economy has always been a little bit weaker than in the previous one. This is a typical example of a Liquidity Trap
http://sapbank.blogspot.de/2012/09/government-ratings-collaterals-and.html
Beginning of 2011 we discussed here that this is not a liquidity issue but a solvency one
Simplifying, all those government actions have eased the tensions in the Financial System by injecting liquidity in a system in which the real problem is lack of solvency generated by a huge debt that simply cannot be paid.
http://sapbank.blogspot.de/2012/09/why-do-they-call-it-love-when-they-mean.html
By injecting liquidity and easing the financial tensions, governments are buying time. I’m not criticizing this approach; as Mr. Mario Draghi (president of the ECB) said some days ago, “buying time is not a minor achievement” http://mobile.reuters.com/article/topNews/idUSBRE83O0CC20120425?feedType=RSS&feedName=topNews
The question is “Buying time”, for what?
For letting people accepting that solving the crisis will require trade sovereignty for debt reduction, with all the social, economic and political implications that this agreement has.
This is the real myth to be broken, maybe not in nine and half weeks, but sooner than expected.
Reducing the debt to sustainable levels is a requisite for recovering trust and solvency, and giving sovereignty is a requirement for coordination and efficient capital management.
The final deal will be painful for both sides, borrowers giving individual freedom and lenders accepting that they will not recover part of the invested Capital.
At the end, if you owe the bank $100, that’s your problem. If you owe the bank $100 million, both parts have a problem.
By the way, a great song http://www.youtube.com/watch?v=4b04jq7NB1s
Looking forward to read your opinions.
Regards.
Ferran
Sunday, September 2, 2012
Basel II and Revisions to the Capital Requirements Directive.
Dear,
You will find below the press communication about the conclusions of the Basel Committee in Banking Supervision regarding the proposal of the Committee for the new Capital Regulation (unofficially the new Basel III Capital Requirements).
As expected, the communication highlights the necessity for increasing the minimum regulatory levels and quality of all the Capital Components (Tier 1, Tier2 and Tier3) and liquidity.
Reinforces the recommendation of the implementation of “Countercycle Provisions Systems”. As you probably remember we discussed a proposal for building a Countercycle Provisions Systems on the posts lasts weeks and the competitive advantage of SAP Bank Analyzer for supporting the model requirement.
Recommends strength the Pillar 2 supervisory process. This is a requirement very well supported by Bank Analyzer-Basel II with its very powerful reporting capabilities and integrated model of the IFRA Architecture.
Communicates that the full package of new standards should be available for the end of the year.
The document is available at http://www.bis.org/speeches/sp100503.htm
Kindest Regards.
Ferran.
You will find below the press communication about the conclusions of the Basel Committee in Banking Supervision regarding the proposal of the Committee for the new Capital Regulation (unofficially the new Basel III Capital Requirements).
As expected, the communication highlights the necessity for increasing the minimum regulatory levels and quality of all the Capital Components (Tier 1, Tier2 and Tier3) and liquidity.
Reinforces the recommendation of the implementation of “Countercycle Provisions Systems”. As you probably remember we discussed a proposal for building a Countercycle Provisions Systems on the posts lasts weeks and the competitive advantage of SAP Bank Analyzer for supporting the model requirement.
Recommends strength the Pillar 2 supervisory process. This is a requirement very well supported by Bank Analyzer-Basel II with its very powerful reporting capabilities and integrated model of the IFRA Architecture.
Communicates that the full package of new standards should be available for the end of the year.
The document is available at http://www.bis.org/speeches/sp100503.htm
Kindest Regards.
Ferran.
Why Bank Analyzer?
Dear SAP Banking Community members,
Some days ago I had a very interesting conversation with a colleague about the “effort” necessary for implementing Bank Analyzer.
In my opinion, a common mistake when we evaluate Bank Analyzer is thinking that BA is “just” a tool for generating regulatory deliverables (Basel II-Regulatory Capital or IFRS-Accounting).
With Bank Analyzer, we try to capture on an integrated data-model (Financial Database), all the economic events which have, or can have, an impact on the Market and Credit Risk that the Bank is exposed to. And from it, evaluate the processes which generate Profit and Liquidity.
Capturing those economical events and represent them in an integrated data-model is not an easy task, it requires a relevant amount of business and technical knowledge. Additionally, many Transactional Banking Systems don’t have the integrated vision of SAP, which makes more difficult to extract the necessary operational data for feeding the integrated risk data-model of BA.
But, what’s the pay back of all this effort?
We’re moving to an economic world in which efficiency is not a competitive advantage, it’s the key to survival.
Efficient management requires looking carefully at the utilization of the critical resources, and the most critical resources of a Bank are Capital for hedging risk, and Liquidity for responding to its liabilities.
That’s exactly what Bank Analyzer is about; with all the data provided by the Financial Data Base, the Bank’s managers have the necessary information for looking forward and evaluate the potential risks before they happen.
Taking decisions before their competitors, managing their assets and liabilities before the economic events of this globalized world affect their value.
Does this worth the effort?
In my opinion it does.
Looking forward to read your opinons.
Kindest Regards.
Ferran.
Some days ago I had a very interesting conversation with a colleague about the “effort” necessary for implementing Bank Analyzer.
In my opinion, a common mistake when we evaluate Bank Analyzer is thinking that BA is “just” a tool for generating regulatory deliverables (Basel II-Regulatory Capital or IFRS-Accounting).
With Bank Analyzer, we try to capture on an integrated data-model (Financial Database), all the economic events which have, or can have, an impact on the Market and Credit Risk that the Bank is exposed to. And from it, evaluate the processes which generate Profit and Liquidity.
Capturing those economical events and represent them in an integrated data-model is not an easy task, it requires a relevant amount of business and technical knowledge. Additionally, many Transactional Banking Systems don’t have the integrated vision of SAP, which makes more difficult to extract the necessary operational data for feeding the integrated risk data-model of BA.
But, what’s the pay back of all this effort?
We’re moving to an economic world in which efficiency is not a competitive advantage, it’s the key to survival.
Efficient management requires looking carefully at the utilization of the critical resources, and the most critical resources of a Bank are Capital for hedging risk, and Liquidity for responding to its liabilities.
That’s exactly what Bank Analyzer is about; with all the data provided by the Financial Data Base, the Bank’s managers have the necessary information for looking forward and evaluate the potential risks before they happen.
Taking decisions before their competitors, managing their assets and liabilities before the economic events of this globalized world affect their value.
Does this worth the effort?
In my opinion it does.
Looking forward to read your opinons.
Kindest Regards.
Ferran.
Capital Management-Chapter V (Dynamic Collateral Management).
Dear SAP Banking Community members.
Yesterday I had a very interesting conversation with a friend, specialist on Credit Derivatives Contracts in Energy markets, about how the increasing requirements of Disclosure and Solvency are rising the prices of Credit Derivative Products.
In my opinion, those higher prices are a direct consequence of the higher cost of the main and necessary resource for offering those hedging Financial Instruments, “Solvency”.
A classical method for Risk Mitigation (solvency improvement), recognized by all the Basel agreements and most of solvency regulations, is collateralization. Consequently, from some perspective, collateral rights are a component of the very critical resource that we call Solvency.
On collaterals management we can follow two approaches.
• Static Collateral Management. The Bank has an exposure (receivable or asset) and requires a collateral right for hedging the Default Risk of the exposure. Normally, the higher the exposure, the higher the collateral that the Bank will require. The collateralization degree will be determined by the difference between the amount of the Exposure and the value of the collateral.
• Dynamic Collateral Management. On the other hand; according to the Basel agreement, Capital consumption (solvency) does not depend directly on the Bank’s exposure, but on the Bank’s exposures “weighted” but the exposures’ risk. Consequently collateralization degree depends on the risk of the exposure, and it changes (dynamically) with it.
The difference on the above approaches has relevant consequences for Capital Management.
In the first case, collateralization does not depend on the exposure’s risk (rating), but only on its size (the risk of the collateral value is somehow considered if we update the collateral value regularly), while in the second approach the risk of the exposure is integrated on the Risk Weighted Assets Calculation and consequently on the collateralization degree.
The second approach is more sensitive on risk and permits a more efficient management of the Collateral, and consequently, the Solvency and Capital.
By the way, as the solvency becomes a more expensive resource, the work of the Counterparty Valuation Adjustment (CVA) desks becomes a more critical activity.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Yesterday I had a very interesting conversation with a friend, specialist on Credit Derivatives Contracts in Energy markets, about how the increasing requirements of Disclosure and Solvency are rising the prices of Credit Derivative Products.
In my opinion, those higher prices are a direct consequence of the higher cost of the main and necessary resource for offering those hedging Financial Instruments, “Solvency”.
A classical method for Risk Mitigation (solvency improvement), recognized by all the Basel agreements and most of solvency regulations, is collateralization. Consequently, from some perspective, collateral rights are a component of the very critical resource that we call Solvency.
On collaterals management we can follow two approaches.
• Static Collateral Management. The Bank has an exposure (receivable or asset) and requires a collateral right for hedging the Default Risk of the exposure. Normally, the higher the exposure, the higher the collateral that the Bank will require. The collateralization degree will be determined by the difference between the amount of the Exposure and the value of the collateral.
• Dynamic Collateral Management. On the other hand; according to the Basel agreement, Capital consumption (solvency) does not depend directly on the Bank’s exposure, but on the Bank’s exposures “weighted” but the exposures’ risk. Consequently collateralization degree depends on the risk of the exposure, and it changes (dynamically) with it.
The difference on the above approaches has relevant consequences for Capital Management.
In the first case, collateralization does not depend on the exposure’s risk (rating), but only on its size (the risk of the collateral value is somehow considered if we update the collateral value regularly), while in the second approach the risk of the exposure is integrated on the Risk Weighted Assets Calculation and consequently on the collateralization degree.
The second approach is more sensitive on risk and permits a more efficient management of the Collateral, and consequently, the Solvency and Capital.
By the way, as the solvency becomes a more expensive resource, the work of the Counterparty Valuation Adjustment (CVA) desks becomes a more critical activity.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Capital Management-Chapter IV (Hedge Accounting).
Dear SAP Banking Community members.
Some weeks ago I was talking to a client (thanks Jason and Lee) about an Integrated Planning Model for Retail Banking in which I’ve been working, and for some minutes we discussed about the topic of Risk Hedging and Regulatory Capital consumption.
A common mistake is considering the calculation of the Risk Weighted Assets of a Bank’s portfolio a static activity for fulfilling regulatory requirements.
Even if the risk department of the Bank has a clear protocol for Hedging Risk of “potentially dangerous” investments, they usually lack a holistic and dynamic analysis of the bank’s business segments or micro-portfolios with common risk characteristics.
From that perspective, Hedge Accounting and Capital management are isolated activities, when in fact they’re both sides (accounting and solvency) of the same mirror (Risk Hedging).
Even more, commonly we hear the expression “hedge accounting adjustments” for referring to Hedge Accounting as an isolated activity; like the premium of proving to have run successfully some regulatory effectiveness tests (IAS 39), as it was something separated of the core value of the Bank's portfolio.
The main driver of efficient Capital Management is visibility of Capital Consumption. By using risk mitigation techniques we reduce the Capital consumption. That reduction is the visible shape of the risk hedging effectiveness of the technique from the solvency perspective.
But on the other hand, the effectiveness of the risk mitigation technique will trigger the “Hedge Accounting adjustment”, as the other visible effect of having an effective risk mitigation relationship.
Does it have sense to look at the two sides of the same reality as separated entities? In my opinion it does not.
Looking forward to know the opinion of other community members.
Kindest Regards.
Ferran.
Some weeks ago I was talking to a client (thanks Jason and Lee) about an Integrated Planning Model for Retail Banking in which I’ve been working, and for some minutes we discussed about the topic of Risk Hedging and Regulatory Capital consumption.
A common mistake is considering the calculation of the Risk Weighted Assets of a Bank’s portfolio a static activity for fulfilling regulatory requirements.
Even if the risk department of the Bank has a clear protocol for Hedging Risk of “potentially dangerous” investments, they usually lack a holistic and dynamic analysis of the bank’s business segments or micro-portfolios with common risk characteristics.
From that perspective, Hedge Accounting and Capital management are isolated activities, when in fact they’re both sides (accounting and solvency) of the same mirror (Risk Hedging).
Even more, commonly we hear the expression “hedge accounting adjustments” for referring to Hedge Accounting as an isolated activity; like the premium of proving to have run successfully some regulatory effectiveness tests (IAS 39), as it was something separated of the core value of the Bank's portfolio.
The main driver of efficient Capital Management is visibility of Capital Consumption. By using risk mitigation techniques we reduce the Capital consumption. That reduction is the visible shape of the risk hedging effectiveness of the technique from the solvency perspective.
But on the other hand, the effectiveness of the risk mitigation technique will trigger the “Hedge Accounting adjustment”, as the other visible effect of having an effective risk mitigation relationship.
Does it have sense to look at the two sides of the same reality as separated entities? In my opinion it does not.
Looking forward to know the opinion of other community members.
Kindest Regards.
Ferran.
Capital Management-Chapter III (Stress Testing).
Dear SAP Banking Community members,
As discussed during the last few weeks, the necessity for a systematic capital management system for all major banks is becoming more and more critical.
From that perspective, let me recommend you to read the following article in the Guardian.
http://www.guardian.co.uk/business/2010/nov/23/europeanbanks-banking
The article highlights the European bank’s share prices after the Ireland bailout. Obviously, the market fears that the losses of some European banks due to their investments in the Irish economy could cause the banks to be undercapitalized or even default.
As you might know capital management requires efficient utilization of capital, and as we are all aware of the risks of having an undercapitalized financial system; credit crunch - no investment/credit, and as the saddest consequence, economic recession.
But the contrary is not desirable either, having an over-capitalized financial system means that very critical resources are frozen without generating any profit for the banks, the shareholders or the economy in general.
Thus it seems natural that an efficient utilization of capital would constitute keeping the capital levels of the bank slightly above
Regulatory Capital Levels (according to the solvency regulation).
- If a bank’s capital is below the regulatory levels: undercapitalized and potentially in insolvency.
- If a bank’s capital is much higher than the regulatory levels: free capital is not invested which is preventing the institution from making additional profits (something that would upset the shareholders).
Now the risk weighted assets calculation is the key for determining the free capital available for future investments, and is consequently a key factor for the bank’s business planning.
Determining the free capital is not an easy task, as any financial investment, by definition, is a dynamic process.
Changes in the economic environment or the risk associated with financial investments produces a different result in the calculation of risk weighted assets, and consequently the bank’s capital consumption.
In my opinion, stress testing is the key. Stress testing has been very important in determining the strength of a financial system in order to support losses in portfolio values and is subsequently also a key component of efficient capital management. From a business planning perspective stress testing is the key for determining the “buffer” of free capital a bank has available for its business planning.
What do you think?
I am looking forward to read your opinions.
Kindest Regards.
Ferran.
As discussed during the last few weeks, the necessity for a systematic capital management system for all major banks is becoming more and more critical.
From that perspective, let me recommend you to read the following article in the Guardian.
http://www.guardian.co.uk/business/2010/nov/23/europeanbanks-banking
The article highlights the European bank’s share prices after the Ireland bailout. Obviously, the market fears that the losses of some European banks due to their investments in the Irish economy could cause the banks to be undercapitalized or even default.
As you might know capital management requires efficient utilization of capital, and as we are all aware of the risks of having an undercapitalized financial system; credit crunch - no investment/credit, and as the saddest consequence, economic recession.
But the contrary is not desirable either, having an over-capitalized financial system means that very critical resources are frozen without generating any profit for the banks, the shareholders or the economy in general.
Thus it seems natural that an efficient utilization of capital would constitute keeping the capital levels of the bank slightly above
Regulatory Capital Levels (according to the solvency regulation).
- If a bank’s capital is below the regulatory levels: undercapitalized and potentially in insolvency.
- If a bank’s capital is much higher than the regulatory levels: free capital is not invested which is preventing the institution from making additional profits (something that would upset the shareholders).
Now the risk weighted assets calculation is the key for determining the free capital available for future investments, and is consequently a key factor for the bank’s business planning.
Determining the free capital is not an easy task, as any financial investment, by definition, is a dynamic process.
Changes in the economic environment or the risk associated with financial investments produces a different result in the calculation of risk weighted assets, and consequently the bank’s capital consumption.
In my opinion, stress testing is the key. Stress testing has been very important in determining the strength of a financial system in order to support losses in portfolio values and is subsequently also a key component of efficient capital management. From a business planning perspective stress testing is the key for determining the “buffer” of free capital a bank has available for its business planning.
What do you think?
I am looking forward to read your opinions.
Kindest Regards.
Ferran.
Capital Management-Chapter II.
Dear SAP Banking Community members,
Weeks ago we talked about the main activities for efficient Capital Management.
This is going to be a very critical activity as the new Basel III regulation and the huge level of assets hold by the international Banking System is generating increasing tensions on the system as many banks are coping with poor capitalization or they’re simply undercapitalized.
On that sense, let me recommend you reading the following article on the Financial Times.
Top US banks face $100bn Basel shortfall
http://www.ft.com/cms/s/42d42de2-f593-11df-99d6-00144feab49a,dwp_uuid=f5d27f8a-a517-11dd-b4f5-000077b07658,print=yes.html
You will see that the article warns the risk of higher lending costs as the Banks can face difficulties for increasing their Capital Levels. Unfortunately it does not say anything about what the efficient determination of that price should be.
Most of Banks determine the prices of Lending (in the retail market) according to the price of the competitors, lacking of a systemic approach for calculating the lending price.
In my opinion, lending price determination (which is one of the most critical activities in Capital Management) must be determined according to a systemic model which has to take into account.
1) Funding Costs of the Loan according to its Currency and Maturity (Yield Curve). Main reference of the price of the Loan as the influence of the bank on determining that price is very limited.
2) Capital Consumption of the Loan and Free Capital of the Bank which represents the main limitation of the Bank for offering assets to the market, and consequently the main restriction for planning assets trade.
3) Market behavior.
I'd like to know the community members opinion.
What do you think?
Kindest Regards.
Ferran.
Weeks ago we talked about the main activities for efficient Capital Management.
This is going to be a very critical activity as the new Basel III regulation and the huge level of assets hold by the international Banking System is generating increasing tensions on the system as many banks are coping with poor capitalization or they’re simply undercapitalized.
On that sense, let me recommend you reading the following article on the Financial Times.
Top US banks face $100bn Basel shortfall
http://www.ft.com/cms/s/42d42de2-f593-11df-99d6-00144feab49a,dwp_uuid=f5d27f8a-a517-11dd-b4f5-000077b07658,print=yes.html
You will see that the article warns the risk of higher lending costs as the Banks can face difficulties for increasing their Capital Levels. Unfortunately it does not say anything about what the efficient determination of that price should be.
Most of Banks determine the prices of Lending (in the retail market) according to the price of the competitors, lacking of a systemic approach for calculating the lending price.
In my opinion, lending price determination (which is one of the most critical activities in Capital Management) must be determined according to a systemic model which has to take into account.
1) Funding Costs of the Loan according to its Currency and Maturity (Yield Curve). Main reference of the price of the Loan as the influence of the bank on determining that price is very limited.
2) Capital Consumption of the Loan and Free Capital of the Bank which represents the main limitation of the Bank for offering assets to the market, and consequently the main restriction for planning assets trade.
3) Market behavior.
I'd like to know the community members opinion.
What do you think?
Kindest Regards.
Ferran.
Capital Management.
Capital Management.
Dear SAP Banking community members.
The more we move into the second phase of the great recession (sovereign debt crisis), the more we feel that the exit strategy is in the efficient management of the resources.
A clear example of that is the raise on the regulatory capital levels proposed by Basel III, because Solvency (Regulatory Capital) is the most critical resource of the Financial System.
What activities should be the response to the requirement of efficient Capital Management?
1) Planning the expected return of an investment as a direct consequence of its regulatory capital consumption. It sounds logical; the more risk the bank is exposed to, the more capital is consumed and the more profit is to be expected. But that means to determine the loans cost according the capital situation of the bank. Are banks currently doing that?
2) Hedge Accounting is an opportunity for improving the bank result with the same portfolio. If the bank can prove that their risk mitigation effects on their exposures IFRS lets them recognize additional profit adjustments with the same capital consumption.
3) Managing liquidity, solvency and profit in an integrated way.
4) Netting of assets and liabilities of the bank for reducing the EAD and consequently the regulatory capital consumption.
5) Dynamic Collateral Management. Right collateralization of the assets is a risk mitigation technique recognized by the solvency regulation, but over-collateralization means inefficient management of the capital. In the end, collateral rights are a “kind” of asset for a Bank. Why not to manage it efficiently so as to improve the Bank’s result.
Those are just some ideas, but I’d like to know the community members opinion.
Kindest Regards.
Ferran.
The more we move into the second phase of the great recession (sovereign debt crisis), the more we feel that the exit strategy is in the efficient management of the resources.
A clear example of that is the raise on the regulatory capital levels proposed by Basel III, because Solvency (Regulatory Capital) is the most critical resource of the Financial System.
What activities should be the response to the requirement of efficient Capital Management?
1) Planning the expected return of an investment as a direct consequence of its regulatory capital consumption. It sounds logical; the more risk the bank is exposed to, the more capital is consumed and the more profit is to be expected. But that means to determine the loans cost according the capital situation of the bank. Are banks currently doing that?
2) Hedge Accounting is an opportunity for improving the bank result with the same portfolio. If the bank can prove that their risk mitigation effects on their exposures IFRS lets them recognize additional profit adjustments with the same capital consumption.
3) Managing liquidity, solvency and profit in an integrated way.
4) Netting of assets and liabilities of the bank for reducing the EAD and consequently the regulatory capital consumption.
5) Dynamic Collateral Management. Right collateralization of the assets is a risk mitigation technique recognized by the solvency regulation, but over-collateralization means inefficient management of the capital. In the end, collateral rights are a “kind” of asset for a Bank. Why not to manage it efficiently so as to improve the Bank’s result.
Those are just some ideas, but I’d like to know the community members opinion.
Kindest Regards.
Ferran.
A Credit Risk Tale - Chapter III
As agreed, some days later the executive committee met again on the Bank Headquarters.
The president talked to them.
“Dear colleagues, I know you’ve worked very hard on analyzing the situation. I’d like to hear your proposals now”.
The Sales VP showed a graphic. As you can see the number of quotations refused by the credit risk department has risen 20% on the last year, this is not reasonable, it’s impossible make business under this circumstances.
Listening carefully, and after letting him finish, the Risks VP explained. At this moment the unemployment is rising dramatically, that’s affecting the risk of new loans, but also actual loans sold on the previous years. Our Risk Weighted Assets have risen significantly, and that’s pushing our Capital Adequacy Ratios. Additionally is being harder and harder to get liquidity using those assets as collateral. Fortunately the Central Bank is covering our liquidity requirements but…
The Sales VP answered, I think it’s not the right time for discussing about technicalities, the diagnostic is more clear than that, without sales there’s no profit. We need to increase our sales and get rid of the toxic assets. Aren’t you saying that the market does not want those assets? Let’s get rid of them.
The Risk VP tried to reply but a he stopped when he saw the President looking at him directly.
The President said, as executives we must define priorities; those new provisions are going to be real losses on the next quarter, the Central Bank is covering all the liquidity requirements. And finally we must be optimistic and believe that the economy will recover and our clients will get new jobs. By reducing credit we’re also getting bad reputation. Those Capital Ratios are important, of course, but the priorities are clear.
What will be the final decision? We’ll talk about it on the oncoming weeks.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
The president talked to them.
“Dear colleagues, I know you’ve worked very hard on analyzing the situation. I’d like to hear your proposals now”.
The Sales VP showed a graphic. As you can see the number of quotations refused by the credit risk department has risen 20% on the last year, this is not reasonable, it’s impossible make business under this circumstances.
Listening carefully, and after letting him finish, the Risks VP explained. At this moment the unemployment is rising dramatically, that’s affecting the risk of new loans, but also actual loans sold on the previous years. Our Risk Weighted Assets have risen significantly, and that’s pushing our Capital Adequacy Ratios. Additionally is being harder and harder to get liquidity using those assets as collateral. Fortunately the Central Bank is covering our liquidity requirements but…
The Sales VP answered, I think it’s not the right time for discussing about technicalities, the diagnostic is more clear than that, without sales there’s no profit. We need to increase our sales and get rid of the toxic assets. Aren’t you saying that the market does not want those assets? Let’s get rid of them.
The Risk VP tried to reply but a he stopped when he saw the President looking at him directly.
The President said, as executives we must define priorities; those new provisions are going to be real losses on the next quarter, the Central Bank is covering all the liquidity requirements. And finally we must be optimistic and believe that the economy will recover and our clients will get new jobs. By reducing credit we’re also getting bad reputation. Those Capital Ratios are important, of course, but the priorities are clear.
What will be the final decision? We’ll talk about it on the oncoming weeks.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
A Credit Risk Tale - Chapter II.
Soon after the regulatory authorities made public the
new provisioning requirement an urgent meeting was called on our
friends Bank Headquarters.
The president of the Bank showed his concerns:
“Dear colleagues, we have 4.000 million Euros in Real Estate properties, most of them have remained in our balance for more than one year. The real estate market is stopped at the moment, and if we sell those properties at the current prices, we’ll have to declare enormous losses”
“As you know, most of those properties come from defaulted Mortgage Loans. At the time, we could rescue our Bank results by accepting the Real Estate Collateral in exchange for cancelling the loan. We thought that if we waited for the market to recover, we could sell them at the valuation price, but the market didn’t recover. And now, with the rising unemployment is impossible to sell those properties at the former prices”.
Then the Sales VP replied; “I have the solution, there’s still a big demand for mortgage loans. We could offer those flats with an assigned financing plan, so we’ll increase our business and we’ll get rid of those “toxic assets”.
“This is a brilliant idea”, the president said. “Why haven’t we done it before?”
The Sales VP answered; “We’re facing difficulties on getting our Loan Quotations approved by the Risk Department”.
The President, disappointed asked the Risks VP; “Why are you making difficult to increase our profits and solve our problems? I don’t like this attitude”
The Risks VP answered; “We analyze all the quotations, the income of the client, his education level, unemployment rate in the region, etc. And of course, we approve every proposal which passes the approval mark”
Well, well, the president said. “I hope everybody understands that the situation is serious, and I need my team to give me solutions, not more problems…”
They finished the meeting and agree to meet again in two weeks for discussing the proposals.
What will our friends do?
We’ll talk about it in some days.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
The president of the Bank showed his concerns:
“Dear colleagues, we have 4.000 million Euros in Real Estate properties, most of them have remained in our balance for more than one year. The real estate market is stopped at the moment, and if we sell those properties at the current prices, we’ll have to declare enormous losses”
“As you know, most of those properties come from defaulted Mortgage Loans. At the time, we could rescue our Bank results by accepting the Real Estate Collateral in exchange for cancelling the loan. We thought that if we waited for the market to recover, we could sell them at the valuation price, but the market didn’t recover. And now, with the rising unemployment is impossible to sell those properties at the former prices”.
Then the Sales VP replied; “I have the solution, there’s still a big demand for mortgage loans. We could offer those flats with an assigned financing plan, so we’ll increase our business and we’ll get rid of those “toxic assets”.
“This is a brilliant idea”, the president said. “Why haven’t we done it before?”
The Sales VP answered; “We’re facing difficulties on getting our Loan Quotations approved by the Risk Department”.
The President, disappointed asked the Risks VP; “Why are you making difficult to increase our profits and solve our problems? I don’t like this attitude”
The Risks VP answered; “We analyze all the quotations, the income of the client, his education level, unemployment rate in the region, etc. And of course, we approve every proposal which passes the approval mark”
Well, well, the president said. “I hope everybody understands that the situation is serious, and I need my team to give me solutions, not more problems…”
They finished the meeting and agree to meet again in two weeks for discussing the proposals.
What will our friends do?
We’ll talk about it in some days.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
A Credit Risk Tale - Chapter I.
Dear SAP Banking Community members,
Once upon a time, there was a Southern European Country suffering the burst of a Real Estate bubble.
One small bank on that country had a huge credit exposure on Real Estate companies which the bank executives knew were going to default very soon.
As they knew, the solvency regulation in the country makes them recognize losses by generating provisions for the impaired loans.
That would be a very bad thing”, one of the executives said,
“If we have to recognize losses, we will not be able of giving dividends to our shareholders, and even worse, we’ll not be able of getting our bonus”.
A smart executive thought, I have the solution; “As most of the loans are covered with real estate collaterals, we’ll accept the collateral in exchange for the debt and we will cancel the loan, so we will not have to recognize the losses”
And they did it.
And month every month the Bank’s balance had more and more Real Estate properties.
So, the banks on that country had so many Real Estate properties in exchange for loans (promised cash-flows) that they started to suffer liquidity problems, and other banks which lend money to our friend’s bank got more and more concerned.
Finally, the regulatory authorities of the country said;
“You’re a bank and not a Real Estate company, and your clients expect cash and not bricks. So as you’re being bad guys I will make you provisioning half of the value of your Real Estate when you keep it for more than one year in your balance”
What will our friends do?
We’ll talk about it next week.
Kindest Regards.
Ferran.
Once upon a time, there was a Southern European Country suffering the burst of a Real Estate bubble.
One small bank on that country had a huge credit exposure on Real Estate companies which the bank executives knew were going to default very soon.
As they knew, the solvency regulation in the country makes them recognize losses by generating provisions for the impaired loans.
That would be a very bad thing”, one of the executives said,
“If we have to recognize losses, we will not be able of giving dividends to our shareholders, and even worse, we’ll not be able of getting our bonus”.
A smart executive thought, I have the solution; “As most of the loans are covered with real estate collaterals, we’ll accept the collateral in exchange for the debt and we will cancel the loan, so we will not have to recognize the losses”
And they did it.
And month every month the Bank’s balance had more and more Real Estate properties.
So, the banks on that country had so many Real Estate properties in exchange for loans (promised cash-flows) that they started to suffer liquidity problems, and other banks which lend money to our friend’s bank got more and more concerned.
Finally, the regulatory authorities of the country said;
“You’re a bank and not a Real Estate company, and your clients expect cash and not bricks. So as you’re being bad guys I will make you provisioning half of the value of your Real Estate when you keep it for more than one year in your balance”
What will our friends do?
We’ll talk about it next week.
Kindest Regards.
Ferran.
Profit and Cash. Opinions and Facts. Chapter III. And the way we were…
Dear SAP Banking community members.
Last weeks, we commented some topics about assets valuation.
Assets valuation, from some perspective, is just a beacon for attracting resources.
For instance, if the government of a big country like China (or any big economic player), decides to incentive the building of railways in front of highways, that will have an impact on the value of the cars, car manufacturers shares, etc; and same story with resources related to the trains industry.
On my last post I commented that the bubbles are just one side effect of the lack of correlation between the price of the limited natural resources and their long term value. By implementing Fiscal and Economical policies, voluntarily or involuntarily the economic agents make some assets more attractive than others, those assets get resources and become even more attractive, in a cycle (maybe vicious, maybe not) which inflates the bubble.
Economic bubbles have very bad reputation because they’re recognized when they burst. Until that happens they make the economy grow, and everybody is happy with economic growth.
Of course, it’s an exaggeration/oversimplification, but the capitalist system, especially after the Bretton Woods agreements and until the oil crisis of the 70s have build economic bubbles (or in more politically correct terms, implemented expansion fiscal policies) to feed the economic growth.
The difficulty comes when we see that the resources are limited, so the asset becomes less attractive as past profits are not maintainable in the future, the bubble burst, economy falls into recession, and we close the loop of the economic cycle. Let me comment that I’m not saying this is good or bad, I’m just saying that in my opinion, that’s the way it works.
Or more exactly, that’s the way it worked. After the real estate bubble burst on the US, UK, Ireland, etc in 2007 and the Financial Crisis of 2008 was visible, the economic agents tried to stimulate the economy by inflating a new bubble of public debt, but recovery didn’t arrive… The main reason, natural resources are limited and oil price remind us that more stimulus would bring hyperinflation and stagflation.
John Maynard Keynes was a genius, and his recommendations took the world out of the 30’s depression (together with the reconstruction of Europe after the second world war, which has probably been the biggest stimulus plan of the history), but at that time the peak oil was still far, far away.
So, if we cannot grow by stimulating consumption, we’ll have to find a new way. Knowledge is the new resource and the new economy will be based on increasing efficiency. But moving from an industrial economy based on consumption to a knowledge based economy is a systemic change. As we’re in a Capitalist System, the Financial Services Industry is the main agent for driving the change, so the Financial Services Industry is going to change, but we’ll talk about it another week.
Whenever we remember, the way we were...
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Last weeks, we commented some topics about assets valuation.
Assets valuation, from some perspective, is just a beacon for attracting resources.
For instance, if the government of a big country like China (or any big economic player), decides to incentive the building of railways in front of highways, that will have an impact on the value of the cars, car manufacturers shares, etc; and same story with resources related to the trains industry.
On my last post I commented that the bubbles are just one side effect of the lack of correlation between the price of the limited natural resources and their long term value. By implementing Fiscal and Economical policies, voluntarily or involuntarily the economic agents make some assets more attractive than others, those assets get resources and become even more attractive, in a cycle (maybe vicious, maybe not) which inflates the bubble.
Economic bubbles have very bad reputation because they’re recognized when they burst. Until that happens they make the economy grow, and everybody is happy with economic growth.
Of course, it’s an exaggeration/oversimplification, but the capitalist system, especially after the Bretton Woods agreements and until the oil crisis of the 70s have build economic bubbles (or in more politically correct terms, implemented expansion fiscal policies) to feed the economic growth.
The difficulty comes when we see that the resources are limited, so the asset becomes less attractive as past profits are not maintainable in the future, the bubble burst, economy falls into recession, and we close the loop of the economic cycle. Let me comment that I’m not saying this is good or bad, I’m just saying that in my opinion, that’s the way it works.
Or more exactly, that’s the way it worked. After the real estate bubble burst on the US, UK, Ireland, etc in 2007 and the Financial Crisis of 2008 was visible, the economic agents tried to stimulate the economy by inflating a new bubble of public debt, but recovery didn’t arrive… The main reason, natural resources are limited and oil price remind us that more stimulus would bring hyperinflation and stagflation.
John Maynard Keynes was a genius, and his recommendations took the world out of the 30’s depression (together with the reconstruction of Europe after the second world war, which has probably been the biggest stimulus plan of the history), but at that time the peak oil was still far, far away.
So, if we cannot grow by stimulating consumption, we’ll have to find a new way. Knowledge is the new resource and the new economy will be based on increasing efficiency. But moving from an industrial economy based on consumption to a knowledge based economy is a systemic change. As we’re in a Capitalist System, the Financial Services Industry is the main agent for driving the change, so the Financial Services Industry is going to change, but we’ll talk about it another week.
Whenever we remember, the way we were...
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Profit and Cash; Opinions and Facts. Chapter II.
Dear friends,
After I posted my last comment, I’ve received some emails and a public comment (thanks Adavi), asking my opinion about the topic.
Of course this is a very complex topic that I’m not capable of describing in just a comment, but I’ll try to give some ideas.
In my opinion, we’re in the first steps of a systemic change towards a knowledge based economy driven by efficiency and productivity.
The Assets Bubbles we’ve seen on the last 15 years (.com, real estate, derivatives and government debt) are just one side effect of the lack of correlation between the price of the limited natural resources and their long term value.
As
the valuation of assets is a critical activity on the assignment of
resources to a specific initiative/investment, the systemic change on
the economy will be oriented by new methods on the valuation of the
assets.
I remember, months ago, I had a very exciting discussion with one of my best friends, Financial Controller and lecturer of Corporate Finance in a prestigious Business School, about the topic of Assets Valuation.
Simplifying, we accept two main valuation methods.
- Mark to Model. Based on moving in time the expected future cash-flows by using a coefficient (interest rate) representing the risk (default, operational and market) of the investment.
- Mark to Market. Based on the idea that all the market agents have the same information and they will exchange the assets at its “Fair Value”.
In
my opinion the experience proves that both assumptions are incomplete.
On one hand the Financial Markets are far from being perfect and the determination of future expected cash flows has proved to be a very difficult activity.
During
the industrial revolution, long time before the first resources crisis
(like the oil crisis of the 70’s) we developed methods for determining
quite accurately the expected cash flows of an investment, as the scenario was stable enough (for example, the sales of General Motors in the decade of the 50s).
But the more we move towards a Knowledge Based economy, the more critical and challenging becomes developing new methods for determining the future cash-flows that an investment can generate.
For example, when in 2006 Twitter was founded I don’t think it was easy to determine the future cash
flows that the initiative could generate according to a “classical”
perspective. In fact when at the time "Biz" Stone was asked publically
what was the company business model, he answered “I don’t know”.
If
we look at a genetic engineering company, capable of generating more
productive soya seeds, in a research process which can last for 10
years, non-classical components of the value like the Intellectual
Capital become the main one for determining the value and risk of the investment.
From
a portfolio management perspective that’s extremely challenge as it
requires an integral vision that the current information systems don’t
have, but we cannot afford not having.
What do you think?
Kindest Regards.
June 12th, 2010
Profit and Cash; Opinions and Facts. Chapter I.
Dear,
When in 1996 I was studying Corporate Finance in my MBA at the ESADE Business School in Barcelona www.esade.edu , our professor used to remind us “Profit is an Opinion, Cash is a Fact”.
Valuation of results has been a very controversial topic on the last 3 years. If we just look back to some news of December 2007 we could read the following “Lehman's 2007 Bonus Pool Rises Almost 10% on Higher Revenue” http://www.bloomberg.com/apps/news?pid=20601087&sid=ajI8xAslBPLc
Let me also recommend you to watch the video http://www.bloomberg.com/avp/avp.htm?N=video&T=Smith+Says+Lehman+%60Exceptional%26%2339%3B+in+Managing+Credit+Risks+&clipSRC=mms://media2.bloomberg.com/cache/vjeCn6L0zIDg.asf
Just 9 months later, on Saturday September 13, 2008, Timothy F. Geithner, the president of the Federal Reserve Bank of New York called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets.
Obviously something was wrong on the “Official Opinion” of the Lehman profits of 2007.
If we look at an “external-market valuation”, we will see that the Dow Jones Industrial Average index fluctuated from 13,365 on December the 28th 2007 to 6,547 on March the 9th 2009 (nearly 50% in 15 months).
The fluctuation was so high that the common opinion was that Mark to Market valuation was not correct, as the main Banks and Financial Institutions had those “toxic assets” in their balance that the market didn’t want at any price, preventing them to get liquidity. And consequently they couldn’t fulfill their function of financing companies and individuals, and finally damaging seriously the economy.
http://www.time.com/time/business/article/0,8599,1884290,00.html
By the way, as The US Economic Emergency Act of 2008 allowed the SEC to suspend mark-to-market accounting rules and increasing liquidity was injected on the System we saw the “Big Rebound” on the Stock Market and the valuation (common market opinion) moved the Dow Jones index to 11,204 on April the 23d 2010.
Today, as the priority becomes the “Fiscal Consolidation” and the illiquidity is moving to the Sovereign Debt Market, the valuation of the assets is falling again (nearly 10% in the last month).
In my opinion, if the Valuation is the determination of the "current worth of an Asset" we're doing something wrong
What do you think?
Kindest Regards.
Ferran.
When in 1996 I was studying Corporate Finance in my MBA at the ESADE Business School in Barcelona www.esade.edu , our professor used to remind us “Profit is an Opinion, Cash is a Fact”.
Valuation of results has been a very controversial topic on the last 3 years. If we just look back to some news of December 2007 we could read the following “Lehman's 2007 Bonus Pool Rises Almost 10% on Higher Revenue” http://www.bloomberg.com/apps/news?pid=20601087&sid=ajI8xAslBPLc
Let me also recommend you to watch the video http://www.bloomberg.com/avp/avp.htm?N=video&T=Smith+Says+Lehman+%60Exceptional%26%2339%3B+in+Managing+Credit+Risks+&clipSRC=mms://media2.bloomberg.com/cache/vjeCn6L0zIDg.asf
Just 9 months later, on Saturday September 13, 2008, Timothy F. Geithner, the president of the Federal Reserve Bank of New York called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets.
Obviously something was wrong on the “Official Opinion” of the Lehman profits of 2007.
If we look at an “external-market valuation”, we will see that the Dow Jones Industrial Average index fluctuated from 13,365 on December the 28th 2007 to 6,547 on March the 9th 2009 (nearly 50% in 15 months).
The fluctuation was so high that the common opinion was that Mark to Market valuation was not correct, as the main Banks and Financial Institutions had those “toxic assets” in their balance that the market didn’t want at any price, preventing them to get liquidity. And consequently they couldn’t fulfill their function of financing companies and individuals, and finally damaging seriously the economy.
http://www.time.com/time/business/article/0,8599,1884290,00.html
By the way, as The US Economic Emergency Act of 2008 allowed the SEC to suspend mark-to-market accounting rules and increasing liquidity was injected on the System we saw the “Big Rebound” on the Stock Market and the valuation (common market opinion) moved the Dow Jones index to 11,204 on April the 23d 2010.
Today, as the priority becomes the “Fiscal Consolidation” and the illiquidity is moving to the Sovereign Debt Market, the valuation of the assets is falling again (nearly 10% in the last month).
In my opinion, if the Valuation is the determination of the "current worth of an Asset" we're doing something wrong
What do you think?
Kindest Regards.
Ferran.
Swiss Franc, the symptom, the illness, Capital and agreement.
Dear,
One of the most lucrative investments on the last 9 months has been speculation in foreign currencies.
As the economic situation worsened in Europe, with lack of confidence in the solvency of the Banking system and rising concerns of dramatic split of the Euro-zone, investors have moved quickly towards so called safe haven investments.
A very popular investment has been the Swiss Franc, and as investors took positions in Swiss nominated assets, markets pushed up the price of the currency.
On the other hand, Swiss economy is very open (exports represent approx. 55% of Swiss GDP, with the Euro-zone as its main trading partner).
As the revaluation of Swiss Franc would represent a serious threat to Swiss economy, Swiss National Bank introduced a fixed exchange rate policy between Swiss Franc and Euro last September (1 Euro = 1.2 Swiss Francs).
In order of fixing the EUR/CHF Forex rate, the Swiss National Bank has become one of the most active Forex traders this year, selling Swiss Francs and buying Euros.
As a consequence the Swiss National Bank has increased its exposure to Euros nominated assets to a level which can be risky in the medium term (SNB reserves in Euros has risen from 51% in March to 60% by June www.snb.ch/en/iabout/assets/id/assets_reserves).
And for making it worse, the potential losses of these exposures will be profits for the speculators; there are no gains in this game for the Swiss people.
Confidence is the key word here; panicking markets are not allocating capital in growth generation activities but in speculative actions. Again, we’re wasting Capital when we cannot afford to do it.
The real problem is the unsustainable debt of Europe problematic countries (around 400% of their GDP). This is the illness which is killing the economy, and markets will not calm down till lenders and borrowers agree on the mechanism to move those debts to more sustainable levels. By the way, US debt is also very scary; we’ll see what happens with it in some months.
Until this problem is tackled authorities are just buying time by wasting capital.
The key concept here is trading sovereignty for debt reduction.
At the end this is logical, lenders demand guarantees that borrowers will pay their debt, and borrowers will have to allocate their limited Capital to productive activities oriented to pay their debt.
Obviously the above statement has deep social, political and economic implications, that’s why we are in a systemic crisis.
Looking forward to read your opinions.
Ferran.
August 11th, 2012
One of the most lucrative investments on the last 9 months has been speculation in foreign currencies.
As the economic situation worsened in Europe, with lack of confidence in the solvency of the Banking system and rising concerns of dramatic split of the Euro-zone, investors have moved quickly towards so called safe haven investments.
A very popular investment has been the Swiss Franc, and as investors took positions in Swiss nominated assets, markets pushed up the price of the currency.
On the other hand, Swiss economy is very open (exports represent approx. 55% of Swiss GDP, with the Euro-zone as its main trading partner).
As the revaluation of Swiss Franc would represent a serious threat to Swiss economy, Swiss National Bank introduced a fixed exchange rate policy between Swiss Franc and Euro last September (1 Euro = 1.2 Swiss Francs).
In order of fixing the EUR/CHF Forex rate, the Swiss National Bank has become one of the most active Forex traders this year, selling Swiss Francs and buying Euros.
As a consequence the Swiss National Bank has increased its exposure to Euros nominated assets to a level which can be risky in the medium term (SNB reserves in Euros has risen from 51% in March to 60% by June www.snb.ch/en/iabout/assets/id/assets_reserves).
And for making it worse, the potential losses of these exposures will be profits for the speculators; there are no gains in this game for the Swiss people.
Confidence is the key word here; panicking markets are not allocating capital in growth generation activities but in speculative actions. Again, we’re wasting Capital when we cannot afford to do it.
The real problem is the unsustainable debt of Europe problematic countries (around 400% of their GDP). This is the illness which is killing the economy, and markets will not calm down till lenders and borrowers agree on the mechanism to move those debts to more sustainable levels. By the way, US debt is also very scary; we’ll see what happens with it in some months.
Until this problem is tackled authorities are just buying time by wasting capital.
The key concept here is trading sovereignty for debt reduction.
At the end this is logical, lenders demand guarantees that borrowers will pay their debt, and borrowers will have to allocate their limited Capital to productive activities oriented to pay their debt.
Obviously the above statement has deep social, political and economic implications, that’s why we are in a systemic crisis.
Looking forward to read your opinions.
Ferran.
August 11th, 2012
Looking for somebody to blame.
Dear,
As you could read in this community in the past, we’re not in the way to the recovery. The exit strategy of this crisis, from the Financial Services perspective, is efficient management of Capital and Liquidity and we’re not there yet.
What are the main actors of the drama saying at this moment?
- Southern European countries (Greece, Spain, Portugal, Italy) and Ireland think that the responsible of the situation is Germany, as Germans are not willing to help them.
http://www.guardian.co.uk/business/2012/feb/15/eurozone-debt-crisis-greece-eurozone-gdp
- Germany is blaming the irresponsible countries for the debt crisis.
http://www.guardian.co.uk/business/2012/jun/14/angela-merkel-warning-eurozone-crisis
- Finally, for some economists, the responsibility lies in the Euro
http://www.nytimes.com/2012/06/18/opinion/krugman-greece-as-victim.html
Ok, just some remarks here.
Obviously there’s been a huge real estate bubble in the southern European countries, big trade unbalances and as a consequence, a huge debt (private and public).
Central Banks of these countries were responsible of controlling the debt levels and auditing the solvency of their Financial System. Why Germany (Finland or Netherlands) has to be co-responsible of their mistakes?
On the other hand the bubble was financed by German and French banks. Those Banks decided to believe that financing Spanish banks for building apartments in the coast was as safe as investing in Leverkusen for developing new medical treatments (actually the trick is that it was much more profitable, at least in the short term).
Finally, building a monetary union without coordinated control mechanisms for avoiding fiscal unbalances is a risky business. Very risky if the economic area includes regions of very different productivities. Prices tend to equalize in a common monetary area, but not the productivity.
This is the past and we cannot change the past, so let’s look ahead.
We all know that the current situation in the southern European countries is very delicate.
Only for them?
Not really, with the tiny expected growth of those countries is going to be very difficult (for not saying impossible) that they pay their whole debt (private and public), and sooner than later more write-offs will have to be accepted.
German banks have exposures of around US$500 billion to the debt issues of peripheral nations. What will be the impact in the solvency of those banks when the borrowers prove to be incapable of fulfilling their obligations? Is this a German problem?
Additionally, the problematic countries have been an excellent market for Germany. Does anybody believe that the fall of consumption rates in those countries is not going to affect their main providers?
http://www.reuters.com/article/2012/07/04/germany-economy-diw-idUSL6E8I4ATA20120704
Unfortunately, this is a global crisis and the solution requires coordination and agreement, first inside the main economic areas and later globally.
On the other hand coordination requires giving sovereignty to supranational entities with different priorities and interests. A very difficult challenge indeed.
We have serious problems and we need serious leadership. Looking for somebody to blame can be a good excuse in the short term, but in the midterm is a waste of Political Capital, and wasting Capital is something we cannot afford.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
As you could read in this community in the past, we’re not in the way to the recovery. The exit strategy of this crisis, from the Financial Services perspective, is efficient management of Capital and Liquidity and we’re not there yet.
What are the main actors of the drama saying at this moment?
- Southern European countries (Greece, Spain, Portugal, Italy) and Ireland think that the responsible of the situation is Germany, as Germans are not willing to help them.
http://www.guardian.co.uk/business/2012/feb/15/eurozone-debt-crisis-greece-eurozone-gdp
- Germany is blaming the irresponsible countries for the debt crisis.
http://www.guardian.co.uk/business/2012/jun/14/angela-merkel-warning-eurozone-crisis
- Finally, for some economists, the responsibility lies in the Euro
http://www.nytimes.com/2012/06/18/opinion/krugman-greece-as-victim.html
Ok, just some remarks here.
Obviously there’s been a huge real estate bubble in the southern European countries, big trade unbalances and as a consequence, a huge debt (private and public).
Central Banks of these countries were responsible of controlling the debt levels and auditing the solvency of their Financial System. Why Germany (Finland or Netherlands) has to be co-responsible of their mistakes?
On the other hand the bubble was financed by German and French banks. Those Banks decided to believe that financing Spanish banks for building apartments in the coast was as safe as investing in Leverkusen for developing new medical treatments (actually the trick is that it was much more profitable, at least in the short term).
Finally, building a monetary union without coordinated control mechanisms for avoiding fiscal unbalances is a risky business. Very risky if the economic area includes regions of very different productivities. Prices tend to equalize in a common monetary area, but not the productivity.
This is the past and we cannot change the past, so let’s look ahead.
We all know that the current situation in the southern European countries is very delicate.
Only for them?
Not really, with the tiny expected growth of those countries is going to be very difficult (for not saying impossible) that they pay their whole debt (private and public), and sooner than later more write-offs will have to be accepted.
German banks have exposures of around US$500 billion to the debt issues of peripheral nations. What will be the impact in the solvency of those banks when the borrowers prove to be incapable of fulfilling their obligations? Is this a German problem?
Additionally, the problematic countries have been an excellent market for Germany. Does anybody believe that the fall of consumption rates in those countries is not going to affect their main providers?
http://www.reuters.com/article/2012/07/04/germany-economy-diw-idUSL6E8I4ATA20120704
Unfortunately, this is a global crisis and the solution requires coordination and agreement, first inside the main economic areas and later globally.
On the other hand coordination requires giving sovereignty to supranational entities with different priorities and interests. A very difficult challenge indeed.
We have serious problems and we need serious leadership. Looking for somebody to blame can be a good excuse in the short term, but in the midterm is a waste of Political Capital, and wasting Capital is something we cannot afford.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Towards a Capital-centric architecture.
Dear,
The Systemic Crisis is driving a major transformation in the Financial Services Industry, from a business model based in volume to a business model based in efficient management of Capital and Liquidity (both critical and scarce resources).
This is a new scenario in which the objective is not selling as much as possible for maximizing profit; rather, it’s about maximizing profit optimizing capital and liquidity consumption.
This new paradigm has significant ramifications for the architecture of the Information Systems for Banks. If the new scenario has new priorities, Information Systems must be aligned with them.
Let’s look at some examples from the past.
Historically, Information Systems were based in Accounting, as the accounting perspective was considered the most complete representation of the company. Typically, companies were managed by looking at its accounting magnitudes.
On the 70s, 80s, and driven by the Oil crisis, executives priority moved towards considering the company as a number of resources which should be managed in an integrated way (optimizing the use of the resources). Consequently, we developed Enterprise Resource Planning Systems (ERP), with SAP as the visionary leader.
At the end of the 80s and early 90s the priority was optimizing Production, Storage and Transportation resources and we designed Information Systems centered in optimization of logistics resources. As a consequence a new architecture showed up: Supply Chain Management (SCM) systems became the priority.
At the end of the 90s, with the Internet revolution and the over-consumption society we have enjoyed since then, business became client-centered. The priority was to sell the client as much as possible (cross-selling and up-selling). Thus, Information Systems were built around the client: Customer Relationship Management (CRM).
With the Financial Crisis and the new regulation increasing Capital and Liquidity Levels (Basel III for instance), the new paradigm is efficient Capital and Liquidity management. What is the answer of the Information Systems to the new requests?
Capital and Liquidity management must be at the center of the Banking Information Systems.
They’re the most critical resources, and managing them efficiently, is the main priority.
This is not CRM, SCM, ERP or SOA; it’s something new. They all offer advantages which are still valid, but as the situation is new and the requirements have changed, the architecture needs to be adapted to the new scenario.
Risk, Liquidity and Profit must be at the center of the information system offering to the executives and integrated vision of where and how Capital is allocated and consumed.
In my opinion, the Integrated Financial and Risk Architecture of SAP Bank Analyzer is an excellent candidate for this Capital-centric architecture which is going to be required.
We also need to educate the market about this new architecture and how can be aligned with the new paradigm, but this is a different story.
Looking forward to read your opinions.
Regards.
Ferran.
The Systemic Crisis is driving a major transformation in the Financial Services Industry, from a business model based in volume to a business model based in efficient management of Capital and Liquidity (both critical and scarce resources).
This is a new scenario in which the objective is not selling as much as possible for maximizing profit; rather, it’s about maximizing profit optimizing capital and liquidity consumption.
This new paradigm has significant ramifications for the architecture of the Information Systems for Banks. If the new scenario has new priorities, Information Systems must be aligned with them.
Let’s look at some examples from the past.
Historically, Information Systems were based in Accounting, as the accounting perspective was considered the most complete representation of the company. Typically, companies were managed by looking at its accounting magnitudes.
On the 70s, 80s, and driven by the Oil crisis, executives priority moved towards considering the company as a number of resources which should be managed in an integrated way (optimizing the use of the resources). Consequently, we developed Enterprise Resource Planning Systems (ERP), with SAP as the visionary leader.
At the end of the 80s and early 90s the priority was optimizing Production, Storage and Transportation resources and we designed Information Systems centered in optimization of logistics resources. As a consequence a new architecture showed up: Supply Chain Management (SCM) systems became the priority.
At the end of the 90s, with the Internet revolution and the over-consumption society we have enjoyed since then, business became client-centered. The priority was to sell the client as much as possible (cross-selling and up-selling). Thus, Information Systems were built around the client: Customer Relationship Management (CRM).
With the Financial Crisis and the new regulation increasing Capital and Liquidity Levels (Basel III for instance), the new paradigm is efficient Capital and Liquidity management. What is the answer of the Information Systems to the new requests?
Capital and Liquidity management must be at the center of the Banking Information Systems.
They’re the most critical resources, and managing them efficiently, is the main priority.
This is not CRM, SCM, ERP or SOA; it’s something new. They all offer advantages which are still valid, but as the situation is new and the requirements have changed, the architecture needs to be adapted to the new scenario.
Risk, Liquidity and Profit must be at the center of the information system offering to the executives and integrated vision of where and how Capital is allocated and consumed.
In my opinion, the Integrated Financial and Risk Architecture of SAP Bank Analyzer is an excellent candidate for this Capital-centric architecture which is going to be required.
We also need to educate the market about this new architecture and how can be aligned with the new paradigm, but this is a different story.
Looking forward to read your opinions.
Regards.
Ferran.
Banks, governments and prisoner's dilemma.
Dear SAP Banking community members.
Some days ago I received an email from a former student of my strategy courses at the Open University of Catalonia http://www.uoc.edu/portal/english/index5.html (he’s also a member of this community and a regular reader of my blogs) who asked me some interesting questions.
- If the Financial System (and the economic world) has to move from a model based in volume (wasting resources) to a new model based on efficient management of Capital and Liquidity (critical and scarce resources) driven by a more strict regulation, why the process is taking so long?
- What’s the point of pouring millions of Dollars/Euros in Financial System rescue packages and not preventing that the bad practices which produced the 2008 Financial Crisis are repeated again?
And added;
you always say that these changes take time, but the question is why?
In my opinion, the best explanation comes from the Games Theory, which explains the behavior of rational decision-makers in conflict and cooperation situations. One of the highest contributions to this theory was proposed by John Forbes Nash (1994 Nobel Prize of Economics) and it’s called after him "the Nash Equilibrium".
A typical example of the Games Theory is the Prisoner’s dilemma which proposes the following scenario.
Two prisoners have been detained. And they’re asked to confess.
Four possibilities emerge from the dilemma:
1) Prisoner A confesses and prisoner B refuses to confess. In this case they’re both declared guilty but prisoner B receives a much harder penalty (20 years) than prisoner A (5 years).
2) Same case if prisoner B confesses and prisoner A refuses to confess.
3) Both prisoners confess. They’re both declared guilty (10 years).
4) No-one confesses. They’re both released because there’re no other evidences against them.
It seems clear that the best option for them is number 4. But without an agreement they will both confess as it’s the best option which relies only on each one’s hands.
On the other hand if they make a pact and don’t confess (because they can communicate and trust each other), they both will be in the best situation; this particular case is called "iterated prisoners dilemma" which ends with a collaboration equilibrium.
Now, let’s look at the current situation of the Financial System from the Games Theory perspective.
The financial system needs public support for avoiding bankruptcy and the regulator requests the system to abandon risky activities (increase solvency, liquidity, disclosure etc.) for avoiding future crisis (growth rates are going to be low from now on so we cannot afford wasting solvency).
If we describe this situation from the prisoner’s dilemma, we get the following scenario.
1) Governments rescue the financial system and the financial system doesn’t eliminate/reduce speculative activities. Bad scenario for the government.
2) Governments don’t rescue the financial system and banks eliminate bad practices by themselves. Bad scenario for the banks.
3) Governments don’t rescue the financial system and banks don’t eliminate bad practices. Total crash. Very bad scenario for both sides.
4) Governments rescue the financial system and the financial system t eliminates speculative activities. Collaborative equilibrium.
Of course this is a necessary simplification for writing a short and direct post and the reality is much more complex than this example.
Nevertheless, in my opinion, this is the main reason why the implementation of a new Financial Regulation is a very slow process as achieving a collaborative equilibrium between the regulator and banks requires the prisoner’s dilemma to be played with iterations which is a very slow process.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Some days ago I received an email from a former student of my strategy courses at the Open University of Catalonia http://www.uoc.edu/portal/english/index5.html (he’s also a member of this community and a regular reader of my blogs) who asked me some interesting questions.
- If the Financial System (and the economic world) has to move from a model based in volume (wasting resources) to a new model based on efficient management of Capital and Liquidity (critical and scarce resources) driven by a more strict regulation, why the process is taking so long?
- What’s the point of pouring millions of Dollars/Euros in Financial System rescue packages and not preventing that the bad practices which produced the 2008 Financial Crisis are repeated again?
And added;
you always say that these changes take time, but the question is why?
In my opinion, the best explanation comes from the Games Theory, which explains the behavior of rational decision-makers in conflict and cooperation situations. One of the highest contributions to this theory was proposed by John Forbes Nash (1994 Nobel Prize of Economics) and it’s called after him "the Nash Equilibrium".
A typical example of the Games Theory is the Prisoner’s dilemma which proposes the following scenario.
Two prisoners have been detained. And they’re asked to confess.
Four possibilities emerge from the dilemma:
1) Prisoner A confesses and prisoner B refuses to confess. In this case they’re both declared guilty but prisoner B receives a much harder penalty (20 years) than prisoner A (5 years).
2) Same case if prisoner B confesses and prisoner A refuses to confess.
3) Both prisoners confess. They’re both declared guilty (10 years).
4) No-one confesses. They’re both released because there’re no other evidences against them.
It seems clear that the best option for them is number 4. But without an agreement they will both confess as it’s the best option which relies only on each one’s hands.
On the other hand if they make a pact and don’t confess (because they can communicate and trust each other), they both will be in the best situation; this particular case is called "iterated prisoners dilemma" which ends with a collaboration equilibrium.
Now, let’s look at the current situation of the Financial System from the Games Theory perspective.
The financial system needs public support for avoiding bankruptcy and the regulator requests the system to abandon risky activities (increase solvency, liquidity, disclosure etc.) for avoiding future crisis (growth rates are going to be low from now on so we cannot afford wasting solvency).
If we describe this situation from the prisoner’s dilemma, we get the following scenario.
1) Governments rescue the financial system and the financial system doesn’t eliminate/reduce speculative activities. Bad scenario for the government.
2) Governments don’t rescue the financial system and banks eliminate bad practices by themselves. Bad scenario for the banks.
3) Governments don’t rescue the financial system and banks don’t eliminate bad practices. Total crash. Very bad scenario for both sides.
4) Governments rescue the financial system and the financial system t eliminates speculative activities. Collaborative equilibrium.
Of course this is a necessary simplification for writing a short and direct post and the reality is much more complex than this example.
Nevertheless, in my opinion, this is the main reason why the implementation of a new Financial Regulation is a very slow process as achieving a collaborative equilibrium between the regulator and banks requires the prisoner’s dilemma to be played with iterations which is a very slow process.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Mobility, Efficiency and Strategy.
Dear SAP Banking community members,
As we move into the Mobility Revolution and the most popular gurus describe mobility as the driver of a new era in Banking I miss some answers, particularly one.
Mobility, what for?
I have the feeling that we’re all dazzled by the growth figures of smartphones, apps and tablets sales, and we moved quickly in that direction with the message; as the clients are moving there we have to be there.
Is this enough to succeed? Probably not.
Obviously mobility offers new opportunities, but we shouldn’t forget that markets are people, and people were out there long time before the first mobile device was even designed.
We’re definitely moving into a new Banking era (financial crisis makes it clear every day), with efficient management of Capital and Liquidity as the main driver of the transformation, and mobility has some answers for aligning Banks in the direction of the new paradigm.
Mobility offers a direct channel for exchanging massive amount of data between the market and the decision center of Capital and Liquidity management in a Bank, without intermediaries and in real time.
This is a great achievement but it means nothing by itself. Data is useless unless supports decisions making, data has to evolve in information and knowledge. It’s only at this point when data becomes valuable.
Let me give you an example;
Clients, both Retail and Corporate have their own forecast of incomes and expenses (inflows or outflows) and plan their investment/saving/consuming activities, consciously or unconsciously according this forecast.
These individual forecasts (and the aggregation of them) are very important for the liquidity managers of the bank, as the bank’s liquidity requirements are impacted by the behavior of its clients.
Mobility can provide the data but the bank’s information system needs to be ready to process the data and transforming it in relevant information for the liquidity planners.
At the end, the answer is integration; only integrated systems are capable of building communication channels with common semantics between the periphery and the core of the system. This is a mandatory requirement for converting data in information.
In my opinion, SAP, with 40 years of experience in building integrated Information Systems is in a privileged position for offering the holistic vision that the efficiency paradigm requires.
Mobility will be a very important element of the transformation, but we have to move the focus of the strategy, from volume of data to relevancy of the information.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
As we move into the Mobility Revolution and the most popular gurus describe mobility as the driver of a new era in Banking I miss some answers, particularly one.
Mobility, what for?
I have the feeling that we’re all dazzled by the growth figures of smartphones, apps and tablets sales, and we moved quickly in that direction with the message; as the clients are moving there we have to be there.
Is this enough to succeed? Probably not.
Obviously mobility offers new opportunities, but we shouldn’t forget that markets are people, and people were out there long time before the first mobile device was even designed.
We’re definitely moving into a new Banking era (financial crisis makes it clear every day), with efficient management of Capital and Liquidity as the main driver of the transformation, and mobility has some answers for aligning Banks in the direction of the new paradigm.
Mobility offers a direct channel for exchanging massive amount of data between the market and the decision center of Capital and Liquidity management in a Bank, without intermediaries and in real time.
This is a great achievement but it means nothing by itself. Data is useless unless supports decisions making, data has to evolve in information and knowledge. It’s only at this point when data becomes valuable.
Let me give you an example;
Clients, both Retail and Corporate have their own forecast of incomes and expenses (inflows or outflows) and plan their investment/saving/consuming activities, consciously or unconsciously according this forecast.
These individual forecasts (and the aggregation of them) are very important for the liquidity managers of the bank, as the bank’s liquidity requirements are impacted by the behavior of its clients.
Mobility can provide the data but the bank’s information system needs to be ready to process the data and transforming it in relevant information for the liquidity planners.
At the end, the answer is integration; only integrated systems are capable of building communication channels with common semantics between the periphery and the core of the system. This is a mandatory requirement for converting data in information.
In my opinion, SAP, with 40 years of experience in building integrated Information Systems is in a privileged position for offering the holistic vision that the efficiency paradigm requires.
Mobility will be a very important element of the transformation, but we have to move the focus of the strategy, from volume of data to relevancy of the information.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
The role of the Clearing Houses in a liquidity crisis.
Dear SAP Banking community members,
On the last two weeks we’ve been looking at Greece, apparently the result of its elections was the key to trigger an economic Armageddon.
But 1 week after the Greeks voted what they were said to vote the situation remains the same.
The International Monetary Fund is warning that European leaders have three months to save the Euro.
http://amanpour.blogs.cnn.com/2012/06/11/lagarde-less-than-three-months-to-save-the-euro/
We’ll see in some weeks what’s going to happen with the Euro, if something is going to happen; but today, let’s see what’s happened with Greek’s economy.
For understanding the current Greece situation we have to look at the starting of the Eurozone in 2001. After joining the Eurozone, interest rates in Greece dropped dramatically as the markets wanted to believe that with the elimination of Forex Risk, investing in the Greek economy was as save as investing in Germany or Netherlands.
With the very low interest rates and the low productivity of the Greek economy, the final result was a huge overconsumption bubble which ended with unsustainable fiscal and external imbalances.
For details, I recommend the very good paper in the link below.
http://www.bankofgreece.gr/BogEkdoseis/Paper2011124.pdf
For years nobody looked at those economic imbalances, and as a consequence Greek spread moved from 600 points over the German bond on 1998 to historically low levels in 2003.
You also can have a look at the ratings of Greece sovereign debt at the time here
http://www.fitchratings.com/web_content/ratings/sovereign_ratings_history.xls
Did the markets become blind and deaf or just stupid?
Not really, for years markets made good dividends investing in Greece. Again, a Financial Crisis can be a great business opportunity (for some).
On 2007 – 2008, suddenly, everything became visible and clear (debt, deficit, fiscal imbalances, etc.), and the markets response was to rise the Greek bond spread (again, very good business opportunity for those who took short positions on Greek’s assets, invested in Greeks CDS’s, etc.)
Now, we’re at the end of the process, doing business with Greek economy is not possible anymore ; now it’s the time that Greece pays the debt, or more exactly that part of the debt that Greeks can pay.
That’s why Greeks have to vote the right thing, accept stabilization programs and become poorer and poorer.
During the whole process the clearing houses played a very important role. Greek banks could get liquidity using as a collateral Greek’s assets, making its economy more and more dependent and
inflating the bubble.
When it was the right time for exploding the bubble, clearing houses played their role again, drying liquidity from Greek’s economy, letting fall the value of Greek’s assets, and reducing their value as collateral; in a vicious cycle of insolvency and liquidity crisis.
For years, nobody wanted to see how liquidity was hiding the real health of Greek’s economy.
By the way, this is the same situation of the American economy, and again the markets choose to be blind and keep US spread very low.
Are they stupid? Of course not, inflating the US debt bubble is still a very good business, we’ll see for how long.
“I'm here for one reason and one reason alone. I'm here to guess, what the music might do, a week, a month, a year from now.” (Margin Call – 2011)
Looking forward to read your opinions.
Kindest Regards.
Ferran
On the last two weeks we’ve been looking at Greece, apparently the result of its elections was the key to trigger an economic Armageddon.
But 1 week after the Greeks voted what they were said to vote the situation remains the same.
The International Monetary Fund is warning that European leaders have three months to save the Euro.
http://amanpour.blogs.cnn.com/2012/06/11/lagarde-less-than-three-months-to-save-the-euro/
We’ll see in some weeks what’s going to happen with the Euro, if something is going to happen; but today, let’s see what’s happened with Greek’s economy.
For understanding the current Greece situation we have to look at the starting of the Eurozone in 2001. After joining the Eurozone, interest rates in Greece dropped dramatically as the markets wanted to believe that with the elimination of Forex Risk, investing in the Greek economy was as save as investing in Germany or Netherlands.
With the very low interest rates and the low productivity of the Greek economy, the final result was a huge overconsumption bubble which ended with unsustainable fiscal and external imbalances.
For details, I recommend the very good paper in the link below.
http://www.bankofgreece.gr/BogEkdoseis/Paper2011124.pdf
For years nobody looked at those economic imbalances, and as a consequence Greek spread moved from 600 points over the German bond on 1998 to historically low levels in 2003.
You also can have a look at the ratings of Greece sovereign debt at the time here
http://www.fitchratings.com/web_content/ratings/sovereign_ratings_history.xls
Did the markets become blind and deaf or just stupid?
Not really, for years markets made good dividends investing in Greece. Again, a Financial Crisis can be a great business opportunity (for some).
On 2007 – 2008, suddenly, everything became visible and clear (debt, deficit, fiscal imbalances, etc.), and the markets response was to rise the Greek bond spread (again, very good business opportunity for those who took short positions on Greek’s assets, invested in Greeks CDS’s, etc.)
Now, we’re at the end of the process, doing business with Greek economy is not possible anymore ; now it’s the time that Greece pays the debt, or more exactly that part of the debt that Greeks can pay.
That’s why Greeks have to vote the right thing, accept stabilization programs and become poorer and poorer.
During the whole process the clearing houses played a very important role. Greek banks could get liquidity using as a collateral Greek’s assets, making its economy more and more dependent and
inflating the bubble.
When it was the right time for exploding the bubble, clearing houses played their role again, drying liquidity from Greek’s economy, letting fall the value of Greek’s assets, and reducing their value as collateral; in a vicious cycle of insolvency and liquidity crisis.
For years, nobody wanted to see how liquidity was hiding the real health of Greek’s economy.
By the way, this is the same situation of the American economy, and again the markets choose to be blind and keep US spread very low.
Are they stupid? Of course not, inflating the US debt bubble is still a very good business, we’ll see for how long.
“I'm here for one reason and one reason alone. I'm here to guess, what the music might do, a week, a month, a year from now.” (Margin Call – 2011)
Looking forward to read your opinions.
Kindest Regards.
Ferran
Hard-Power, Soft-Power and Soft-Skills.
Dear SAP Banking community members.
Another interesting week in the evolution of the Banking System while we move deeper into the Financial Crisis.
Last Friday, Spanish government nationalized Bankia, fourth Bank in the country. Again, another bailout and private debt converted in public debt.
http://www.bloomberg.com/news/2012-05-09/spain-takes-over-bankia-readies-second-bailout-after-rato-quits.html
The chain of events has been, more or less, as follows.
1) July 2011. Bankia performed and Initial Public Offering with a discount of up to 54% to its book value (around 12.000 Million Euro). Apparently concerns on the market on the Health of the Spanish Financial System push down the price of the IPO.
http://www.economist.com/node/1889785554
2) May 4th, 2012 Bankia presents results for 2011 without the signature of the auditor.
3) May 8th, 2012. Mr. Rodrigo Rato, former Managing Director of the International Monetary Fund and President of Bankia presented his resignation.
http://www.bloomberg.com/news/2012-05-07/spain-said-to-plan-bankia-cleanup-as-banks-may-get-funds.html
4) May 9th, 2012. Spanish government nationalizes Bankia and injects 4.500 Million Euros for its recapitalization 9 months after being valuated in 12.000 Million Euro.
In my opinion, this is just part of the story.
Since the start of the Financial Crisis in 2008, the spread of Spanish government Bonds (also private of course) has grown dramatically and this week achieved 4.5 percentage points. Very close to the point in which other countries had to request a bailout from the IMF and other European countries.
Is it a good business buying Spanish debt? Obviously, it depends on the risk.
If I have the guarantee that I will get my money back, it’s a very good business.
On the other hand if that guarantee is public from the beginning, other investors will have interest in buying that debt and spread (and profit) will be lower.
In fact, from an investment perspective is better waiting to invest till Spanish economy is in recession and country’s government position is much weaker. At that time, investors will have the power of negotiating better conditions (including guarantees).
Even more; while Spanish situation worsens, speculators can make good profits taking short positions against country’s debt, pushing up the spread, and weakening the government negotiating position.
In the meantime, it’s very important that the rest of the world believes that this crisis is going to be short (2008), it’s starting to end (2009), economy it’s improving with some risks (2010), implement austerity programs for a stronger recovery (2011), etc.
Let me recommend you an interview to Mr. Paul Krugman comparing the Iceland and Irish approaches in front their banks insolvency.
http://www.irishcentral.com/news/Irelands-bailout-is-Worse-than-a-Crime-says-NY-Times-columnist-110850374.html
I fully agree that Iceland situation is much better than Irish today because the countries approached to their Banking insolvency with very different strategies. But I don’t agree that this was "by mistake".
A Financial Crisis can be a very good business (for some) and at the end it’s a balance of power; governments, banks, hedge funds with different interests and priorities.
It’s not personal; it’s business (The Godfather-1972).
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Another interesting week in the evolution of the Banking System while we move deeper into the Financial Crisis.
Last Friday, Spanish government nationalized Bankia, fourth Bank in the country. Again, another bailout and private debt converted in public debt.
http://www.bloomberg.com/news/2012-05-09/spain-takes-over-bankia-readies-second-bailout-after-rato-quits.html
The chain of events has been, more or less, as follows.
1) July 2011. Bankia performed and Initial Public Offering with a discount of up to 54% to its book value (around 12.000 Million Euro). Apparently concerns on the market on the Health of the Spanish Financial System push down the price of the IPO.
http://www.economist.com/node/1889785554
2) May 4th, 2012 Bankia presents results for 2011 without the signature of the auditor.
3) May 8th, 2012. Mr. Rodrigo Rato, former Managing Director of the International Monetary Fund and President of Bankia presented his resignation.
http://www.bloomberg.com/news/2012-05-07/spain-said-to-plan-bankia-cleanup-as-banks-may-get-funds.html
4) May 9th, 2012. Spanish government nationalizes Bankia and injects 4.500 Million Euros for its recapitalization 9 months after being valuated in 12.000 Million Euro.
In my opinion, this is just part of the story.
Since the start of the Financial Crisis in 2008, the spread of Spanish government Bonds (also private of course) has grown dramatically and this week achieved 4.5 percentage points. Very close to the point in which other countries had to request a bailout from the IMF and other European countries.
Is it a good business buying Spanish debt? Obviously, it depends on the risk.
If I have the guarantee that I will get my money back, it’s a very good business.
On the other hand if that guarantee is public from the beginning, other investors will have interest in buying that debt and spread (and profit) will be lower.
In fact, from an investment perspective is better waiting to invest till Spanish economy is in recession and country’s government position is much weaker. At that time, investors will have the power of negotiating better conditions (including guarantees).
Even more; while Spanish situation worsens, speculators can make good profits taking short positions against country’s debt, pushing up the spread, and weakening the government negotiating position.
In the meantime, it’s very important that the rest of the world believes that this crisis is going to be short (2008), it’s starting to end (2009), economy it’s improving with some risks (2010), implement austerity programs for a stronger recovery (2011), etc.
Let me recommend you an interview to Mr. Paul Krugman comparing the Iceland and Irish approaches in front their banks insolvency.
http://www.irishcentral.com/news/Irelands-bailout-is-Worse-than-a-Crime-says-NY-Times-columnist-110850374.html
I fully agree that Iceland situation is much better than Irish today because the countries approached to their Banking insolvency with very different strategies. But I don’t agree that this was "by mistake".
A Financial Crisis can be a very good business (for some) and at the end it’s a balance of power; governments, banks, hedge funds with different interests and priorities.
It’s not personal; it’s business (The Godfather-1972).
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Why aren’t we in the path to recovery?
Dear SAP Banking community members.
Mr. David Cameron, United Kingdom Prime Minister, made yesterday some interesting comments, talking about the financial crisis in Europe; he warned that the Eurozone debt crisis is not “anywhere near halfway" to being resolved, and blamed it for Britain's double-dip recession.
http://www.independent.co.uk/news/uk/politics/eurozone-crisis-has-a-long-way-to-go-warns-cameron-7689150.html
I cannot agree more with the first part of the statement and I cannot disagree more with the second part.
Why I think we’re still far from the end of the crisis? Simply, because the exit strategy of this crisis will be efficient management of capital and liquidity, and the process has not started yet.
Some comments in the news on the last days;
According to the economist Spanish banks could require €60 billion-80 billion to restore confidence
http://www.economist.com/node/21553499
But if the real estate bubble in Spain has been financed indirectly by foreign (mainly German) banks, what’s the solvency of German banks holding debt of Spanish banks with solvency issues?
It’s absolutely impossible talking properly about Capital management if we don’t know the real value of the assets in the Financial System balances; till that happens we will not start to walk towards recovery
Why I don’t agree with the second part of Mr. Cameron’s statement?
Mr. Cameron also said struggling economies across the Channel, which receive 40 per cent of all UK exports, were harming Britain's prosperity.
Correct, but he also should remember that exporting to those countries was the basis of past UK’s prosperity. If those countries hadn’t wasted solvency the way they did UK’s exports would have been much smaller.
We’re in a global economy, and what a country does affects the others, in UK and in Australia.
Asked why the US was growing after implementing a less strict austerity policy than the UK, Mr. Cameron said: "They don't have the Eurozone on their doorstep, and we've seen in the last couple of weeks Spain going into recession, Holland going into recession, Italy going into recession."
Sorry Mr. Cameron but you’re wrong, US is growing because in spite of his huge debt and deficit the rest of the world is still financing the country http://www.usdebtclock.org/
Is this sustainable? Of course not, sooner than later US bonds spreads will rise and the US will have to implement severe austerity programs bringing the country into recession. When that happens, will Mr. Cameron blame the Eurozone? Probably not.
Looking forward to read your comments.
Kindest Regards.
Ferran.
Mr. David Cameron, United Kingdom Prime Minister, made yesterday some interesting comments, talking about the financial crisis in Europe; he warned that the Eurozone debt crisis is not “anywhere near halfway" to being resolved, and blamed it for Britain's double-dip recession.
http://www.independent.co.uk/news/uk/politics/eurozone-crisis-has-a-long-way-to-go-warns-cameron-7689150.html
I cannot agree more with the first part of the statement and I cannot disagree more with the second part.
Why I think we’re still far from the end of the crisis? Simply, because the exit strategy of this crisis will be efficient management of capital and liquidity, and the process has not started yet.
Some comments in the news on the last days;
According to the economist Spanish banks could require €60 billion-80 billion to restore confidence
http://www.economist.com/node/21553499
But if the real estate bubble in Spain has been financed indirectly by foreign (mainly German) banks, what’s the solvency of German banks holding debt of Spanish banks with solvency issues?
It’s absolutely impossible talking properly about Capital management if we don’t know the real value of the assets in the Financial System balances; till that happens we will not start to walk towards recovery
Why I don’t agree with the second part of Mr. Cameron’s statement?
Mr. Cameron also said struggling economies across the Channel, which receive 40 per cent of all UK exports, were harming Britain's prosperity.
Correct, but he also should remember that exporting to those countries was the basis of past UK’s prosperity. If those countries hadn’t wasted solvency the way they did UK’s exports would have been much smaller.
We’re in a global economy, and what a country does affects the others, in UK and in Australia.
Asked why the US was growing after implementing a less strict austerity policy than the UK, Mr. Cameron said: "They don't have the Eurozone on their doorstep, and we've seen in the last couple of weeks Spain going into recession, Holland going into recession, Italy going into recession."
Sorry Mr. Cameron but you’re wrong, US is growing because in spite of his huge debt and deficit the rest of the world is still financing the country http://www.usdebtclock.org/
Is this sustainable? Of course not, sooner than later US bonds spreads will rise and the US will have to implement severe austerity programs bringing the country into recession. When that happens, will Mr. Cameron blame the Eurozone? Probably not.
Looking forward to read your comments.
Kindest Regards.
Ferran.
The cost of Solvency and SAP Banking.
Dear SAP Banking community members,
Last week I had a very interesting conversation with the manager of one of the main references when it comes to Bank Analyzer implementations.
As the discussion moved to the client’s perception of the cost and return of the implementation, he described how the client’s CFO thought that it was cheaper to hire 3 accountants for preparing the regulatory reporting than getting the reporting done by Bank Analyzer.
It’s an interesting point, wrong in my opinion, but common enough to deserve being discussed here.
Assuming the 3 accountants could generate the regulatory reporting, it’s unlikely, for not saying impossible they will be able of offering the disclosure levels that Bank Analyzer does.
With much manual work, supported by spreadsheets, and paper based analysis you can build a static representation of the Banks statements/solvency; but we’re in a dynamic environment in which explaining the results is more important than the results themselves.
We live in a globally interconnected economy, and unexpected events spread their effects to economic agents very far from the place where the event happened.
On the other hand, uncertainty and lack of confidence have moved the whole financial system into a liquidity trap. Getting capital and liquidity requires very big efforts to Banks and Organizations.
Central Banks are trying to push the economy with extremely low interest rates and unorthodox quantitative easing initiatives, but recovery has not arrived. In fact it’s not even coming. Several months after every injection of liquidity their effects disappear, bringing instability to the bonds and stocks market but keeping high prices of critical commodities.
This is a systemic crisis which will last for years and it will end with a new model in the Financial System (from volume to efficiency).
It’s in this new context where we must position the return on investment of a SAP Banking implementation, particularly Bank Analyzer.
In a liquidity trap, Capital and Liquidity are very scarce resources. In this environment attracting investors with capital and clients with liquidity are the most critical activities.
The answer is disclosure; we’ve seen many myths falling since September 2008. As the crisis evolves, investors will be more and more suspicious and they will only believe if banks give them reasons to believe.
Like Caesar's wife, banks should be above suspicion.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Last week I had a very interesting conversation with the manager of one of the main references when it comes to Bank Analyzer implementations.
As the discussion moved to the client’s perception of the cost and return of the implementation, he described how the client’s CFO thought that it was cheaper to hire 3 accountants for preparing the regulatory reporting than getting the reporting done by Bank Analyzer.
It’s an interesting point, wrong in my opinion, but common enough to deserve being discussed here.
Assuming the 3 accountants could generate the regulatory reporting, it’s unlikely, for not saying impossible they will be able of offering the disclosure levels that Bank Analyzer does.
With much manual work, supported by spreadsheets, and paper based analysis you can build a static representation of the Banks statements/solvency; but we’re in a dynamic environment in which explaining the results is more important than the results themselves.
We live in a globally interconnected economy, and unexpected events spread their effects to economic agents very far from the place where the event happened.
On the other hand, uncertainty and lack of confidence have moved the whole financial system into a liquidity trap. Getting capital and liquidity requires very big efforts to Banks and Organizations.
Central Banks are trying to push the economy with extremely low interest rates and unorthodox quantitative easing initiatives, but recovery has not arrived. In fact it’s not even coming. Several months after every injection of liquidity their effects disappear, bringing instability to the bonds and stocks market but keeping high prices of critical commodities.
This is a systemic crisis which will last for years and it will end with a new model in the Financial System (from volume to efficiency).
It’s in this new context where we must position the return on investment of a SAP Banking implementation, particularly Bank Analyzer.
In a liquidity trap, Capital and Liquidity are very scarce resources. In this environment attracting investors with capital and clients with liquidity are the most critical activities.
The answer is disclosure; we’ve seen many myths falling since September 2008. As the crisis evolves, investors will be more and more suspicious and they will only believe if banks give them reasons to believe.
Like Caesar's wife, banks should be above suspicion.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Capital Optimization and logistics constrains.
Dear SAP Banking community members.
A common mistake when we’re defining Capital Management is limiting its scope to Portfolio Management. In fact Capital Management has a broader scope which includes portfolio management. But as we’ve seen with the examples of Kantox or In-House Banking, business processes management is as important for Capital Management as Portfolio Management.
A particular opportunity for improvement in business processes applied to Capital Management is the management of physical currency.
Management of physical currency presents several challenges for Banks.
- Very High storage costs.
- Cost of opportunity for non-invested Capital. Currency in branches and ATM machines is not producing any profit, in times of high liquidity constrains this is a very expensive resource that banks can’t afford wasting.
- Very High Transportation Costs.
- Availability of cash is a very sensitive matter and consequently high safety stocks levels are required for guaranteeing customer satisfaction.
- Physical Currency demand can be modeled according to statistical patterns.
In my case, before working in Banking I worked for more than 10 years as Supply Chain Management Consultant with SAP for companies like Henkel, J&J or Sara Lee, and it’s clear to me that the challenges above are very similar, if not the same, that those confronted by other companies with complex distribution channels (consumer, electronics, etc.)
A particular disturbing issue in Supply Chain Management is the bullwhip effect. It refers to a trend of larger and larger swings in inventory in response to changes in demand. Inefficient management of the supply chain with limited visibility increases variability of the client’s demand one moves up the supply chain, as small changes in consumer demand can result in large variations in orders placed upstream. As a consequence, the company supports higher costs and offers poorer service.
Unfortunately it’s not easy to find Bankers who are aware of the potential improvements of applying Supply Chain Management Knowledge for Capital Optimization. For instance, two weeks ago I was discussing this topic with a friend, senior executive in a retail bank in Asia. He was aware of the opportunity that Supply Chain Management represents for reducing transportation costs, but it was not obvious for him that this was also a component of Capital Management.
SAP is the recognized leader in Supply Chain Management and the lessons learned managing Supply Chains in other industries are very useful for Banking. At least it worked for me, as my friend admitted at the end that efficient Capital Management requires also managing the logistics constrains of physical currency distribution.
By the way, if you want to know more about what SAP can offer in this area, you will find more detailed information here.
http://www.sap.com/netherlands/about/events/registration_point_solutions_packages/presentaties/CMO.pdf
Looking forward to read your opinions.
K. Regards.
Ferran.
A common mistake when we’re defining Capital Management is limiting its scope to Portfolio Management. In fact Capital Management has a broader scope which includes portfolio management. But as we’ve seen with the examples of Kantox or In-House Banking, business processes management is as important for Capital Management as Portfolio Management.
A particular opportunity for improvement in business processes applied to Capital Management is the management of physical currency.
Management of physical currency presents several challenges for Banks.
- Very High storage costs.
- Cost of opportunity for non-invested Capital. Currency in branches and ATM machines is not producing any profit, in times of high liquidity constrains this is a very expensive resource that banks can’t afford wasting.
- Very High Transportation Costs.
- Availability of cash is a very sensitive matter and consequently high safety stocks levels are required for guaranteeing customer satisfaction.
- Physical Currency demand can be modeled according to statistical patterns.
In my case, before working in Banking I worked for more than 10 years as Supply Chain Management Consultant with SAP for companies like Henkel, J&J or Sara Lee, and it’s clear to me that the challenges above are very similar, if not the same, that those confronted by other companies with complex distribution channels (consumer, electronics, etc.)
A particular disturbing issue in Supply Chain Management is the bullwhip effect. It refers to a trend of larger and larger swings in inventory in response to changes in demand. Inefficient management of the supply chain with limited visibility increases variability of the client’s demand one moves up the supply chain, as small changes in consumer demand can result in large variations in orders placed upstream. As a consequence, the company supports higher costs and offers poorer service.
Unfortunately it’s not easy to find Bankers who are aware of the potential improvements of applying Supply Chain Management Knowledge for Capital Optimization. For instance, two weeks ago I was discussing this topic with a friend, senior executive in a retail bank in Asia. He was aware of the opportunity that Supply Chain Management represents for reducing transportation costs, but it was not obvious for him that this was also a component of Capital Management.
SAP is the recognized leader in Supply Chain Management and the lessons learned managing Supply Chains in other industries are very useful for Banking. At least it worked for me, as my friend admitted at the end that efficient Capital Management requires also managing the logistics constrains of physical currency distribution.
By the way, if you want to know more about what SAP can offer in this area, you will find more detailed information here.
http://www.sap.com/netherlands/about/events/registration_point_solutions_packages/presentaties/CMO.pdf
Looking forward to read your opinions.
K. Regards.
Ferran.
Tobin Tax. The history book on the shelf is always repeating itself.
Dear SAP Banking community members.
Apparently, some political leaders are starting to be aware that Capital Optimization is the most critical activity and try to reinforce new regulations against speculation.
Playing their roles as European leaders, Mrs. Angela Merkel and Mr. Nicolas Sarkozy are pushing for the implementation of a new Tax penalizing short-term speculative investments in foreign currency.
But calling this Tax something new is, at least, an irony. In fact this kind of tax was named Tobin Tax after the economist James Tobin who analyzed the risk of foreign currency speculation after the end of the Bretton Woods System on the 70’s.
Some years later Tobin described this anti-speculation tax with the following words;
“The basic idea of this tax is the following; at each exchange of a currency into another a small tax would be levied - let's say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets”
But in fact, concerns about inefficient allocation of capital by speculators are much older. One of the first economists in describing this concern was John Maynard Keynes, one of the parents of the New Deal which took the world out of the 30’s Great Depression. He was very aware that in not growing economies the effects of speculative investments are very dangerous.
I cannot deny that the introduction of this Tax would potentially have two “positive” effects.
1) Reduction of short-term speculative movements on foreign currencies, as many of them would become unprofitable with the introduction of the Tobin Tax.
2) Increase public revenues in a historical moment in which developed countries are confronting huge solvency issues, represented by falling rating of Government debt.
But in my opinion, reality of current economic world is more complex and the effects of the Tobin Tax will be very limited, at least under its current proposed configuration.
- First, we’re in a global world, and speculators can easily transfer their operations to countries in which this tax is not implemented. It’s not by chance that British Prime Minister David Cameron has firmly opposed to the implementation of the Tobin Tax.
- Second, the proposed Tax will have a linear effect, penalizing both, speculative and non-speculative investments. Probably, penalizing investments is not the best idea on the current economic environment.
We shouldn’t forget that this is a systemic crisis and the exit strategy of a systemic crisis requires changing and reshaping the system with the implementation of new business models. By the way, those who must know, they do know this; look at the title of this year World Economic Annual Meeting in Davos http://www.weforum.org/events/world-economic-forum-annual-meeting-2012
We’ve seen recently several examples of new models for Capital Optimization in this forum (P2P Foreign Exchange hedging with Kantox, Global Assets and Liabilities Management with In-House Banking, Porfolio Optimization with In-Memory Computing/HANA).
In my opinion all of them represent more efficient methods of Capital Allocation than the implementation of a Foreign Currency Investment Tax, but implementing new business models is an slow process, that’s why we are in a systemic crisis.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Apparently, some political leaders are starting to be aware that Capital Optimization is the most critical activity and try to reinforce new regulations against speculation.
Playing their roles as European leaders, Mrs. Angela Merkel and Mr. Nicolas Sarkozy are pushing for the implementation of a new Tax penalizing short-term speculative investments in foreign currency.
But calling this Tax something new is, at least, an irony. In fact this kind of tax was named Tobin Tax after the economist James Tobin who analyzed the risk of foreign currency speculation after the end of the Bretton Woods System on the 70’s.
Some years later Tobin described this anti-speculation tax with the following words;
“The basic idea of this tax is the following; at each exchange of a currency into another a small tax would be levied - let's say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets”
But in fact, concerns about inefficient allocation of capital by speculators are much older. One of the first economists in describing this concern was John Maynard Keynes, one of the parents of the New Deal which took the world out of the 30’s Great Depression. He was very aware that in not growing economies the effects of speculative investments are very dangerous.
I cannot deny that the introduction of this Tax would potentially have two “positive” effects.
1) Reduction of short-term speculative movements on foreign currencies, as many of them would become unprofitable with the introduction of the Tobin Tax.
2) Increase public revenues in a historical moment in which developed countries are confronting huge solvency issues, represented by falling rating of Government debt.
But in my opinion, reality of current economic world is more complex and the effects of the Tobin Tax will be very limited, at least under its current proposed configuration.
- First, we’re in a global world, and speculators can easily transfer their operations to countries in which this tax is not implemented. It’s not by chance that British Prime Minister David Cameron has firmly opposed to the implementation of the Tobin Tax.
- Second, the proposed Tax will have a linear effect, penalizing both, speculative and non-speculative investments. Probably, penalizing investments is not the best idea on the current economic environment.
We shouldn’t forget that this is a systemic crisis and the exit strategy of a systemic crisis requires changing and reshaping the system with the implementation of new business models. By the way, those who must know, they do know this; look at the title of this year World Economic Annual Meeting in Davos http://www.weforum.org/events/world-economic-forum-annual-meeting-2012
We’ve seen recently several examples of new models for Capital Optimization in this forum (P2P Foreign Exchange hedging with Kantox, Global Assets and Liabilities Management with In-House Banking, Porfolio Optimization with In-Memory Computing/HANA).
In my opinion all of them represent more efficient methods of Capital Allocation than the implementation of a Foreign Currency Investment Tax, but implementing new business models is an slow process, that’s why we are in a systemic crisis.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Capital Optimization and SAP HANA.
Dear SAP Banking community members.
As I got yesterday the certification in SAP HANA, I thought it would be a good time for talking about SAP HANA and Capital Optimization.
In my opinion SAP HANA is a paradigm change in Information Technology and, if smartly used, a very powerful tool for efficient Capital management.
Most of you have heard that in-memory computing is about fast reporting, and this is true, but it also offers less intuitive opportunities which make SAP HANA very powerful, for instance;
1) From an architecture perspective SAP HANA provides near real-time analytical reporting without requiring aggregates, by accessing to the same persistent database used by the Transactional System. One of the main difficulties of the Banking Information Systems is the lack of integration, which makes nearly impossible to track detailed information from the analytical level to the operational level. As a result it’s not feasible analyze in detail risk/profit and liquidity by micro-portfolios and nearly impossible, drilling down from the micro-portfolio to the Business Transactions and Financial Transactions in the Operating System.
With SAP Banking business suite is feasible jumping from the integrated vision of the portfolio in the Financial Database to the Contracts and Business Transactions in the Operating system. But this integration can be lost in the reporting data-warehouse, as referential integrity is not granted in data-warehouses (in practical terms not even feasible). With the fast reporting capabilities of SAP HANA, we can eliminate the data-warehouse layer simplifying dramatically the landscape (I’m sure that we’ll see many more examples of landscape simplifications as this technology becomes massively used). A more simplified architecture will facilitate easier audit, analytical and operational reconciliation and with it, much more effective capital consumption, liquidity and profit measurement.
2) The real advantage of a new technology never comes by doing the same things faster, but by doing new things which are not feasible with the old technology. Financial Crisis is coming with a new regulation into the Financial System. The new regulation is driving a systemic change, from a business model based in volume to a model based in efficient management of Capital and Liquidity (very expensive resources from now on). Efficient Capital and Liquidity management require new and more detailed models for planning and simulation of banks portfolios. A particular case in which I’ve been working for a while is translating Goldratt’s theory of constraints to portfolio management, by including Regulatory Capital and Liquidity as planning constrains. These simulations require intensive calculations which can be achieved by the fast calculation capabilities of in-memory computing.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
As I got yesterday the certification in SAP HANA, I thought it would be a good time for talking about SAP HANA and Capital Optimization.
In my opinion SAP HANA is a paradigm change in Information Technology and, if smartly used, a very powerful tool for efficient Capital management.
Most of you have heard that in-memory computing is about fast reporting, and this is true, but it also offers less intuitive opportunities which make SAP HANA very powerful, for instance;
1) From an architecture perspective SAP HANA provides near real-time analytical reporting without requiring aggregates, by accessing to the same persistent database used by the Transactional System. One of the main difficulties of the Banking Information Systems is the lack of integration, which makes nearly impossible to track detailed information from the analytical level to the operational level. As a result it’s not feasible analyze in detail risk/profit and liquidity by micro-portfolios and nearly impossible, drilling down from the micro-portfolio to the Business Transactions and Financial Transactions in the Operating System.
With SAP Banking business suite is feasible jumping from the integrated vision of the portfolio in the Financial Database to the Contracts and Business Transactions in the Operating system. But this integration can be lost in the reporting data-warehouse, as referential integrity is not granted in data-warehouses (in practical terms not even feasible). With the fast reporting capabilities of SAP HANA, we can eliminate the data-warehouse layer simplifying dramatically the landscape (I’m sure that we’ll see many more examples of landscape simplifications as this technology becomes massively used). A more simplified architecture will facilitate easier audit, analytical and operational reconciliation and with it, much more effective capital consumption, liquidity and profit measurement.
2) The real advantage of a new technology never comes by doing the same things faster, but by doing new things which are not feasible with the old technology. Financial Crisis is coming with a new regulation into the Financial System. The new regulation is driving a systemic change, from a business model based in volume to a model based in efficient management of Capital and Liquidity (very expensive resources from now on). Efficient Capital and Liquidity management require new and more detailed models for planning and simulation of banks portfolios. A particular case in which I’ve been working for a while is translating Goldratt’s theory of constraints to portfolio management, by including Regulatory Capital and Liquidity as planning constrains. These simulations require intensive calculations which can be achieved by the fast calculation capabilities of in-memory computing.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
In-House Banking. It’s not what it looks like.
Dear SAP Banking Community members.
According to a classical definition the Financial System function is allocating resources (capital and liquidity) to develop economic activities.
For many years this function has been performed with some inefficiencies (bubbles) but high growth rates have always been able of hiding those inefficiencies.
But now we’re entering in a new scenario, structural unbalances, debt levels and commodity prices make very difficult to grow at historical rates, consequently inefficiencies are much more visible and painful.
The path to develop a financial system driven by efficient management of capital and liquidity is long, that’s why I think we’re in a systemic crisis/depression.
In a systemic change new models appear and some of them replace old models till the new system has been build.
We talk weeks ago about alternative models for market risk mitigation (P2P Forex Risk Hedging); I’d like to discuss today another one.
Global corporations are starting to develop strategic initiatives of In-House Banking; there’re many examples, one of the best known is Siemens.
http://www.siemens.com/innovation/en/publikationen/publications_pof/pof_spring_2008/digital_assistants/computer_im_finanzsektor.htm
Common understanding is In-House Banking is about to reduce transaction costs of payments and collections by netting internal payments and reduce the number of external transactions.
Let’s see a simple example.
We have a corporation with branches in China and Headquarters in the US.
- Branch in China pays vendors in China and invoices the headquarters in the US.
- Headquarters in the US receives invoices from the branch in China and invoices clients in the US.
From a corporate perspective, money does not have to travel from a Bank in the US to a Bank in China for clearing the payment, but just recognize a liability in the headquarters General Ledger and an asset in the General Ledger of the Chinese branch. The final debt can be cleared when the Chinese branch pays dividends to the Headquarters.
Obviously this scenario represents a cost reduction in Banking wires and currency conversions.
In real life, more complex scenarios are present as the Chinese branch has to pay invoices to a logistics provider in the US, those payments could be handled by the Headquarters “on behalf” of the Chinese branch, using a local bank in the US. Again, a very nice opportunity for costs reduction.
But, reality is always much more complex than any business case, in fact the reality is that companies don’t compete against others, but clusters of companies collaborate and compete against other clusters.
Netting assets and liabilities inside the cluster, without supporting wires and currency conversion expenses is also a very nice opportunity of costs reduction.
I’m not denying the importance of the costs reductions described above, but in my opinion, they’re not the strategic opportunity that in-house banking represents.
Some of you will have seen already that using the information provided by an in-house banking system, it should be easy to mitigate Forex risk by netting exposures, for instance headquarters and Chinese branch could sign OTC Forward Forex contracts and they both would hedge their Forex risk without a bank intervention. Same example but with more opportunities of forex risk hedging, if we consider other companies of the cluster.
In the new scenario Capital and Liquidity are very expensive resources, managing assets and liabilities globally is a critical activity, and the most strategic advantage of any in-house banking initiative.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
According to a classical definition the Financial System function is allocating resources (capital and liquidity) to develop economic activities.
For many years this function has been performed with some inefficiencies (bubbles) but high growth rates have always been able of hiding those inefficiencies.
But now we’re entering in a new scenario, structural unbalances, debt levels and commodity prices make very difficult to grow at historical rates, consequently inefficiencies are much more visible and painful.
The path to develop a financial system driven by efficient management of capital and liquidity is long, that’s why I think we’re in a systemic crisis/depression.
In a systemic change new models appear and some of them replace old models till the new system has been build.
We talk weeks ago about alternative models for market risk mitigation (P2P Forex Risk Hedging); I’d like to discuss today another one.
Global corporations are starting to develop strategic initiatives of In-House Banking; there’re many examples, one of the best known is Siemens.
http://www.siemens.com/innovation/en/publikationen/publications_pof/pof_spring_2008/digital_assistants/computer_im_finanzsektor.htm
Common understanding is In-House Banking is about to reduce transaction costs of payments and collections by netting internal payments and reduce the number of external transactions.
Let’s see a simple example.
We have a corporation with branches in China and Headquarters in the US.
- Branch in China pays vendors in China and invoices the headquarters in the US.
- Headquarters in the US receives invoices from the branch in China and invoices clients in the US.
From a corporate perspective, money does not have to travel from a Bank in the US to a Bank in China for clearing the payment, but just recognize a liability in the headquarters General Ledger and an asset in the General Ledger of the Chinese branch. The final debt can be cleared when the Chinese branch pays dividends to the Headquarters.
Obviously this scenario represents a cost reduction in Banking wires and currency conversions.
In real life, more complex scenarios are present as the Chinese branch has to pay invoices to a logistics provider in the US, those payments could be handled by the Headquarters “on behalf” of the Chinese branch, using a local bank in the US. Again, a very nice opportunity for costs reduction.
But, reality is always much more complex than any business case, in fact the reality is that companies don’t compete against others, but clusters of companies collaborate and compete against other clusters.
Netting assets and liabilities inside the cluster, without supporting wires and currency conversion expenses is also a very nice opportunity of costs reduction.
I’m not denying the importance of the costs reductions described above, but in my opinion, they’re not the strategic opportunity that in-house banking represents.
Some of you will have seen already that using the information provided by an in-house banking system, it should be easy to mitigate Forex risk by netting exposures, for instance headquarters and Chinese branch could sign OTC Forward Forex contracts and they both would hedge their Forex risk without a bank intervention. Same example but with more opportunities of forex risk hedging, if we consider other companies of the cluster.
In the new scenario Capital and Liquidity are very expensive resources, managing assets and liabilities globally is a critical activity, and the most strategic advantage of any in-house banking initiative.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Like tears in rain.
Dear,
New Years eve it’s a good time for looking back and see what’s happened and looking ahead and try to understand what’s coming.
2011
- 1 Year ago two European countries had been rescued (Greece and Ireland).
- 1 Year ago world’s economy seemed to be in the path to recovery.
- 1 Year ago we were told that European Banks (and worldwide banks) were well capitalized.
- 1 Year ago US bonds were triple AAA for the main three rating agencies (Standard and Poors, Fitch and Moody's).
- 1 Year ago we wanted to believe that it was possible to return to the past, that we still had solvency to waste.
2012
- During the 1st quarter of 2012 European banks have to refinance 230.000 million Euros in Bonds (around 1.8% of the European GDP).
- Current estimations of the undercapitalization of European Banks are between 115.000 and 250.000 million Euro, it could be more if economy slows down and default levels increase
- During the 1st quarter of 2012 European countries have to refinance 300.000 million Euros in sovereign Bonds (around 2.5% of the European GDP).
- Rating agencies are warning that main European countries ratings, including France, Austria, Finland, the Netherlands, Luxembourg and Germany (yes, you read correctly, Germany also) are under review, meaning they have a one in two chance of a downgrade within 90 days. http://www.reuters.com/article/2011/12/06/eurozone-sp-idUSN1E7B41IQ20111206
According to the President of the European Central Bank, “pressure that bond markets will be experiencing is really very, very significant if not unprecedented,” http://business.financialpost.com/2011/12/19/unprecedented-bond-pressure-to-hit-eurozone-next-year-says-draghi/
As European Central Bank is not allowed to buy sovereign bonds we have to find an alternative. Let’s give “unprecedented” liquidity to the European banks by 3 years loans program. http://www.washingtonpost.com/business/markets/ecb-making-unprecedented-3-year-loans-to-banks-amid-debt-crisis-tensions/2011/12/21/gIQAXG9i8O_story.html
As a consequence, Euro exchange rate is below 1.3 USD …
… And oil price is over 100$ again.
In fact oil price is very important for understanding the oncoming changes in the financial system.
Simplifying, I’ve heard two groups of opinions amongst economists; either European Central bank and Federal reserve buy more and more public debt (by printing money) so debt will be paid with inflation, or Federal reserve and European Central bank don’t do that so we’ll face a very long recession with deflation.
We must remember that inflation represents “general levels of prices” so it’s an average of the evolution of the prices of many assets, and this can be tricky. If we look at the prices of houses, cars, mega-plasma TV’s, etc. they’re going down in the middle of the recession, but oil price is still high, and oil price has a direct impact in the growth potential of developed economies.
Are the unprecedented liquidity measures of the ECB and the Quantitative Easing programs of the Federal Reserve going to fix this? I don’t think so, in some months will be facing a new recession (maybe it will be called depression at the time) and the effect of these liquidity measures will be over like tears in rain.
We need to learn how to grow without wasting resources; this is not easy and it takes time, that's why we're facing a depression.
By the way, what are European banks doing with the liquidity provided by the European Central Bank? They're depositing the money back in the European Central bank. http://www.guardian.co.uk/business/2011/dec/27/banks-deposit-record-amount-with-ecb?newsfeed=true
Crazy, isn't it? Probably, but that's just another sign that the old model is not working and we have to learn a new one.
Ferran.
New Years eve it’s a good time for looking back and see what’s happened and looking ahead and try to understand what’s coming.
2011
- 1 Year ago two European countries had been rescued (Greece and Ireland).
- 1 Year ago world’s economy seemed to be in the path to recovery.
- 1 Year ago we were told that European Banks (and worldwide banks) were well capitalized.
- 1 Year ago US bonds were triple AAA for the main three rating agencies (Standard and Poors, Fitch and Moody's).
- 1 Year ago we wanted to believe that it was possible to return to the past, that we still had solvency to waste.
2012
- During the 1st quarter of 2012 European banks have to refinance 230.000 million Euros in Bonds (around 1.8% of the European GDP).
- Current estimations of the undercapitalization of European Banks are between 115.000 and 250.000 million Euro, it could be more if economy slows down and default levels increase
- During the 1st quarter of 2012 European countries have to refinance 300.000 million Euros in sovereign Bonds (around 2.5% of the European GDP).
- Rating agencies are warning that main European countries ratings, including France, Austria, Finland, the Netherlands, Luxembourg and Germany (yes, you read correctly, Germany also) are under review, meaning they have a one in two chance of a downgrade within 90 days. http://www.reuters.com/article/2011/12/06/eurozone-sp-idUSN1E7B41IQ20111206
According to the President of the European Central Bank, “pressure that bond markets will be experiencing is really very, very significant if not unprecedented,” http://business.financialpost.com/2011/12/19/unprecedented-bond-pressure-to-hit-eurozone-next-year-says-draghi/
As European Central Bank is not allowed to buy sovereign bonds we have to find an alternative. Let’s give “unprecedented” liquidity to the European banks by 3 years loans program. http://www.washingtonpost.com/business/markets/ecb-making-unprecedented-3-year-loans-to-banks-amid-debt-crisis-tensions/2011/12/21/gIQAXG9i8O_story.html
As a consequence, Euro exchange rate is below 1.3 USD …
… And oil price is over 100$ again.
In fact oil price is very important for understanding the oncoming changes in the financial system.
Simplifying, I’ve heard two groups of opinions amongst economists; either European Central bank and Federal reserve buy more and more public debt (by printing money) so debt will be paid with inflation, or Federal reserve and European Central bank don’t do that so we’ll face a very long recession with deflation.
We must remember that inflation represents “general levels of prices” so it’s an average of the evolution of the prices of many assets, and this can be tricky. If we look at the prices of houses, cars, mega-plasma TV’s, etc. they’re going down in the middle of the recession, but oil price is still high, and oil price has a direct impact in the growth potential of developed economies.
Are the unprecedented liquidity measures of the ECB and the Quantitative Easing programs of the Federal Reserve going to fix this? I don’t think so, in some months will be facing a new recession (maybe it will be called depression at the time) and the effect of these liquidity measures will be over like tears in rain.
We need to learn how to grow without wasting resources; this is not easy and it takes time, that's why we're facing a depression.
By the way, what are European banks doing with the liquidity provided by the European Central Bank? They're depositing the money back in the European Central bank. http://www.guardian.co.uk/business/2011/dec/27/banks-deposit-record-amount-with-ecb?newsfeed=true
Crazy, isn't it? Probably, but that's just another sign that the old model is not working and we have to learn a new one.
Ferran.
America, America.
Dear SAP Banking community members.
This has been an interesting week in the long way to the new model in the Financial System.
Beginning of week the European Central Bank increased liquidity lines in USD, logic movement as the market speculates with the collapse of the Euro zone and US Treasury Bonds emerge as the traditional safe asset.
But assuming the US Bond is a safe asset means that we still can exit the crisis wasting solvency, and no, unfortunately this road is close to the end.
Let’s have a look to some ratios; available at the US debt clock website http://www.usdebtclock.org/ some of them, like the National Debt divided by GDP are really scary. In fact many of them are even worse than those during the Great Depression.
Nevertheless and for the moment the country is still capable of financing its deficit at relatively low interest rates. The question is if this is sustainable and for how long.
If we look at the US debt holders, the largest one is China, with 26 percent of all foreign-held U.S. Treasury securities. The US trade deficit with China is the largest in the world, and a symptom of global economic imbalance. Simplifying China exports manufactured goods to US that US pays with debt.
I cannot deny that the construction has worked very well for the last 15 years but in my opinion this is about to change.
Chinese economy has its own problems, amongst others.
- High inflation rates.
- Low productivity.
- Huge dependence in foreign natural resources.
- Real estate bubble.
This is a challenging scenario for sustaining fiscal problems of the U S for a long time.
The official statement from the World Bank is that Chinese economy is going to land softly http://www.bloomberg.com/news/2011-11-22/world-bank-says-sees-china-soft-landing-as-asia-withstands-europe-economy.html
Personally, I do have serious doubts about it.
Two weeks ago I was visiting Hong Kong and I had the opportunity of talking to some friends, working on investment departments of Hongkongese Banks.
Everybody that I talked to acknowledges that Chinese growth statistics are not realistic; rumors say that nonperforming loans in Chinese banks could be much more than estimated http://www.marketwatch.com/story/chinas-problem-loans-looks-bleaker-moodys-2011-07-05
Can we believe that China will be able of financing US deficit when the solvency problems of the Chinese banks start to be visible and liquidity tensions show up?
I don’t think so.
For the moment, we have to believe that business remains as usual; as markets get concerned about Euro stability, hedge funds and smart money move their assets to the US and everybody has to accept that speculation is the best method for capital allocation.
We still have a little more solvency to waste.
This is today, and tomorrow?
We'll see.
Kindest Regards.
Ferran.
This has been an interesting week in the long way to the new model in the Financial System.
Beginning of week the European Central Bank increased liquidity lines in USD, logic movement as the market speculates with the collapse of the Euro zone and US Treasury Bonds emerge as the traditional safe asset.
But assuming the US Bond is a safe asset means that we still can exit the crisis wasting solvency, and no, unfortunately this road is close to the end.
Let’s have a look to some ratios; available at the US debt clock website http://www.usdebtclock.org/ some of them, like the National Debt divided by GDP are really scary. In fact many of them are even worse than those during the Great Depression.
Nevertheless and for the moment the country is still capable of financing its deficit at relatively low interest rates. The question is if this is sustainable and for how long.
If we look at the US debt holders, the largest one is China, with 26 percent of all foreign-held U.S. Treasury securities. The US trade deficit with China is the largest in the world, and a symptom of global economic imbalance. Simplifying China exports manufactured goods to US that US pays with debt.
I cannot deny that the construction has worked very well for the last 15 years but in my opinion this is about to change.
Chinese economy has its own problems, amongst others.
- High inflation rates.
- Low productivity.
- Huge dependence in foreign natural resources.
- Real estate bubble.
This is a challenging scenario for sustaining fiscal problems of the U S for a long time.
The official statement from the World Bank is that Chinese economy is going to land softly http://www.bloomberg.com/news/2011-11-22/world-bank-says-sees-china-soft-landing-as-asia-withstands-europe-economy.html
Personally, I do have serious doubts about it.
Two weeks ago I was visiting Hong Kong and I had the opportunity of talking to some friends, working on investment departments of Hongkongese Banks.
Everybody that I talked to acknowledges that Chinese growth statistics are not realistic; rumors say that nonperforming loans in Chinese banks could be much more than estimated http://www.marketwatch.com/story/chinas-problem-loans-looks-bleaker-moodys-2011-07-05
Can we believe that China will be able of financing US deficit when the solvency problems of the Chinese banks start to be visible and liquidity tensions show up?
I don’t think so.
For the moment, we have to believe that business remains as usual; as markets get concerned about Euro stability, hedge funds and smart money move their assets to the US and everybody has to accept that speculation is the best method for capital allocation.
We still have a little more solvency to waste.
This is today, and tomorrow?
We'll see.
Kindest Regards.
Ferran.
New models for Capital Optimization. Kantox.
Dear SAP Banking community members.
As we’ve commented several times in this forum, growing by wasting solvency is not an option any more and Capital Optimization is the main objective of the new Financial System.
Today, I’d like to talk about http://kantox.com/ an innovative concept for Capital Optimization on Foreign Exchange Risk Management.
Kantox value proposition is quite simple and valuable; Peer to Peer Foreign Currency Risk Hedging.
Simplifying with an example (more detailed information available in Kantox website).
1) A European company exporting luxury products to the US expects receivable Cash-Flows in US Dollars due in 6 months.
2) An American company, exporting software to Europe expects receivable Cash-Flows in Euros due in 6 months.
3) Via Kantox, both companies enter in to a digitally signed contract in which they agree to exchange their foreign currency flows in 6 months (Over the Counter Forward Contract).
4) On due date both companies will transfer their foreign currency flows to a segregated client account, managed by Kantox .
5) Once Kantox has received the funds from both counterparties it clears the currency flows by transferring the needed funds, in the currencies required, back to the counterparties thus settling the FX hedge transaction.
6) The netting of Forex exposures can be achieved also with two counterparts using the same local currency and inflows and outflows in the same foreign currency. For example an American company exports to Europe expecting future inflows in Euros and an American company imports from Europe expecting outflows in Euros. They can net the inflows and outflows in Euros using Kantox.
This process represents several advantages for Capital Optimization, in front of a standard Forex Risk Hedging process with a Bank.
In a standard process, the bank will sign two contracts with the two counterparts and it will consume Regulatory Capital, according to the Market Risk (Value at Risk) and Credit Risk of the exposures. In the new era in which Capital is a scarce resource, Capital consumption of the hedging will be translated in high fees to the European and American Company.
On the contrary Kantox does not assume any market or credit risk as the counterparts don’t sign the Forex forward contract with Kantox but amongst them. As a consequence, Kantox should offer lower fees than the banks.
Both counterparts have effectively mitigated Market Risk and they’re assuming only the Credit Risk of the Counterpart.
The critical point of the model relies here as the European and American companies are potentially exposed to a higher Credit Risk by signing a Forward contract with another company than doing it with a Bank.
Kantox guarantee that the clearing of the forward contract is happening in segregated client accounts and it will happen only after both parts have honored their obligations. In case one of the parts fails to pay, Kantor will return the other part their cash-flows and it will not charge any fee. Obviously one of the companies will support the losses of Market Risk as it will have been unable of hedging their potential Foreign Exchange losses. Resuming both parts are assuming the Credit Risk of the potential Foreign exchange losses.
I had the opportunity of talking to Philippe Gelis (CEO of Kantox) some days ago and he’s very aware that Kantox main asset is information. Efficient management of information for mitigating Credit Risk described above will be the success factor on Kantox value proposition.
Once again, disclosure is the word.
Looking forward to read your comments.
Kindest Regards.
Ferran.
As we’ve commented several times in this forum, growing by wasting solvency is not an option any more and Capital Optimization is the main objective of the new Financial System.
Today, I’d like to talk about http://kantox.com/ an innovative concept for Capital Optimization on Foreign Exchange Risk Management.
Kantox value proposition is quite simple and valuable; Peer to Peer Foreign Currency Risk Hedging.
Simplifying with an example (more detailed information available in Kantox website).
1) A European company exporting luxury products to the US expects receivable Cash-Flows in US Dollars due in 6 months.
2) An American company, exporting software to Europe expects receivable Cash-Flows in Euros due in 6 months.
3) Via Kantox, both companies enter in to a digitally signed contract in which they agree to exchange their foreign currency flows in 6 months (Over the Counter Forward Contract).
4) On due date both companies will transfer their foreign currency flows to a segregated client account, managed by Kantox .
5) Once Kantox has received the funds from both counterparties it clears the currency flows by transferring the needed funds, in the currencies required, back to the counterparties thus settling the FX hedge transaction.
6) The netting of Forex exposures can be achieved also with two counterparts using the same local currency and inflows and outflows in the same foreign currency. For example an American company exports to Europe expecting future inflows in Euros and an American company imports from Europe expecting outflows in Euros. They can net the inflows and outflows in Euros using Kantox.
This process represents several advantages for Capital Optimization, in front of a standard Forex Risk Hedging process with a Bank.
In a standard process, the bank will sign two contracts with the two counterparts and it will consume Regulatory Capital, according to the Market Risk (Value at Risk) and Credit Risk of the exposures. In the new era in which Capital is a scarce resource, Capital consumption of the hedging will be translated in high fees to the European and American Company.
On the contrary Kantox does not assume any market or credit risk as the counterparts don’t sign the Forex forward contract with Kantox but amongst them. As a consequence, Kantox should offer lower fees than the banks.
Both counterparts have effectively mitigated Market Risk and they’re assuming only the Credit Risk of the Counterpart.
The critical point of the model relies here as the European and American companies are potentially exposed to a higher Credit Risk by signing a Forward contract with another company than doing it with a Bank.
Kantox guarantee that the clearing of the forward contract is happening in segregated client accounts and it will happen only after both parts have honored their obligations. In case one of the parts fails to pay, Kantor will return the other part their cash-flows and it will not charge any fee. Obviously one of the companies will support the losses of Market Risk as it will have been unable of hedging their potential Foreign Exchange losses. Resuming both parts are assuming the Credit Risk of the potential Foreign exchange losses.
I had the opportunity of talking to Philippe Gelis (CEO of Kantox) some days ago and he’s very aware that Kantox main asset is information. Efficient management of information for mitigating Credit Risk described above will be the success factor on Kantox value proposition.
Once again, disclosure is the word.
Looking forward to read your comments.
Kindest Regards.
Ferran.
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