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.
No comments:
Post a Comment