Dear SAP Banking Community members.
When weeks ago we discussed about Capital Allocation, some colleagues commented their concerns about including in the model unexpected losses due to market fluctuations, and its impact on the Capital Consumption.
Regulation has tried to split commercial banking and investment activities in the past and new regulation initiatives seem to come on the same direction.
Nevertheless, independently on the final outcome of those initiatives, Business Planning using Capital Consumption as the main planning constraint remains a critical activity.
When we look at business planning we always start by designing a strategy, coming from a market opportunity and the company resources to cover that market opportunity.
Following step is measuring the expected market volume of the business initiative and marketing strategy with the sales price. The basic question is what our value proposal to the market is and what’s the price we demand?
But we’re in a competitive environment, so competitors and clients behavior must be included in the process, cannibalization, competitor’s offers, seasonality effects, and promotions, must be considered in order of defining the “Optimal Conditions”
Then we must guarantee that we can deliver the proposal we’re promising at the proposed price, so we must check the Capital Consumption of the business plan, and our Capital Ratios for checking the “Free Capital” we can allocate to that business segment.
Then of course unexpected events can rise, that’s because we’ll keep a buffer between the expected Capital Consumption and our Free Capital Levels. Activities like stress testing on different scenarios are the basic tool for defining what those buffer levels must be.
But Bank’s Capital Ratios can be hurt from two different perspectives.
· Credit or Market Risk rise would increase our Capital Requirements.
· Losses on the Value of Bank’s financial instruments which damage its Balance Sheet and consequently its Capital Position.
Detailed Credit and Market Risk Portfolio management are critical activities for supporting the analysis of the origin of Risk Exposures and the sources of the Profits and Losses.
Hedging Strategies supported by detailed analysis of the Bank’s Risk Exposures through effective Risk Portfolio Management are the best answer to the market fluctuations commented at the beginning.
Looking forward to read your comments.
Kindest Regards.
Ferran.
When weeks ago we discussed about Capital Allocation, some colleagues commented their concerns about including in the model unexpected losses due to market fluctuations, and its impact on the Capital Consumption.
Regulation has tried to split commercial banking and investment activities in the past and new regulation initiatives seem to come on the same direction.
Nevertheless, independently on the final outcome of those initiatives, Business Planning using Capital Consumption as the main planning constraint remains a critical activity.
When we look at business planning we always start by designing a strategy, coming from a market opportunity and the company resources to cover that market opportunity.
Following step is measuring the expected market volume of the business initiative and marketing strategy with the sales price. The basic question is what our value proposal to the market is and what’s the price we demand?
But we’re in a competitive environment, so competitors and clients behavior must be included in the process, cannibalization, competitor’s offers, seasonality effects, and promotions, must be considered in order of defining the “Optimal Conditions”
Then we must guarantee that we can deliver the proposal we’re promising at the proposed price, so we must check the Capital Consumption of the business plan, and our Capital Ratios for checking the “Free Capital” we can allocate to that business segment.
Then of course unexpected events can rise, that’s because we’ll keep a buffer between the expected Capital Consumption and our Free Capital Levels. Activities like stress testing on different scenarios are the basic tool for defining what those buffer levels must be.
But Bank’s Capital Ratios can be hurt from two different perspectives.
· Credit or Market Risk rise would increase our Capital Requirements.
· Losses on the Value of Bank’s financial instruments which damage its Balance Sheet and consequently its Capital Position.
Detailed Credit and Market Risk Portfolio management are critical activities for supporting the analysis of the origin of Risk Exposures and the sources of the Profits and Losses.
Hedging Strategies supported by detailed analysis of the Bank’s Risk Exposures through effective Risk Portfolio Management are the best answer to the market fluctuations commented at the beginning.
Looking forward to read your comments.
Kindest Regards.
Ferran.
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