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.
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