Basel III: Necessary, but not sufficient. Have you looked at Bank Analyzer?

Dear,
Let me recommend you to read the speech “Basel III: Necessary, but not sufficient”, by the Secretary General of the Basel Committee on Banking Supervision, Mr. Wayne Byres.

http://www.bis.org/speeches/sp121106.pdf

There’re very interesting points in the speech.
- Capital and Liquidity requirements are going to be much higher for preventing future crisis.
- Regulations were insufficient to act as a constraint on the natural incentive within banks to increase leverage.
- We need to understand the demands of the environment we are presently living in.
- Shareholders will still want to avoid having excess capital sitting idle.
- Capital strength is a competitive advantage at a time of fragile markets and weak economic conditions.
- A robust set of international banking standards is critical for the future

We could argue why all these recommendations are valid today and not 10 years ago, but the key point is, as Mr. Byres points out “the demands of the environment”.

We’re in a systemic crisis and the environment has changed forever, debt levels and resources scarcity have become a huge limitation for growth.

http://www.telegraph.co.uk/finance/financialcrisis/9585027/IMF-Global-recovery-will-take-at-least-six-more-years.html

and

http://www.oecd.org/berlin/50405107.pdf

And Mr. Wayne Byres is describing how the Financial System will fulfill its function in the new economic model that will emerge from this systemic crisis.

Limited growth means limited Capital, and the logic answer for this Capital scarcity is increasing Capital Requirements. But with higher Capital requirements less Capital will be available for investing, driving the Financial System transformation from a business model based in volume to a business model based in efficient management of Capital and Liquidity. Again, Capital and Liquidity management are going to be the critical activity of the Financial System.

Efficient Capital and Liquidity management is at the foundation of the Integrated Financial and Risk Architecture of Bank Analyzer, and consequently the best answer for the requirements of the new Financial System that Mr. Byres is describing.

We’ll look at it with more detail in a future post.

Looking forward to read your opinions.

K. Regards.

Carrying, showing and using bazookas.

Dear SAP Banking community members,
Since the starting of the Financial Crisis, the term Bazooka has become very popular.

On 2008 US-Treasury secretary Hank Paulson requested a Bazooka for stabilizing the Financial Markets, preventing that the action of the short-sellers made fall the market value of a company.

Simplifying, short-sellers make fall the market value of a company by “selling” shares of the company that they don’t actually own, but they have “rented”. Later, they will buy the security at a lower price, and return it to his owner. The difference on the higher selling price than the lower buying price will make the speculator margin.

On the other hand, if the government (or any other agent) is ready to buy any security that speculators put in the market, the price of the security will not fail. If the price of the security does not fail, taking a short-position is not a good business, as the speculator will have to buy the rented security that they sold at the beginning, at a higher price (they have to return the rented security to its owner).

That’s the whole idea of carrying a bazooka, if the speculators feel that they can lose their money by taking short-positions in a security (as the government has the cash for buying the security and preventing from making fall its price), they will refrain from doing it, and the security price will not fall.

Apparently, if you have a gun you will have to use it, if you have a bazooka you will not.
http://money.cnn.com/2008/09/06/news/economy/fannie_freddie_paulson.fortune/

The same approach has been followed in the last years by governments in North-America and Europe.

http://www.washingtonpost.com/business/economy/ecb-loads-the-big-bazooka/2012/09/06/a4ff5a2a-f814-11e1-8b93-c4f4ab1c8d13_story.html

Unfortunately, there’s something wrong in the whole construction. In a world of limited capital, no agent (not even governments) can carry a bazooka (liquidity) big enough for preventing financial markets from panicking. That’s why Mr. Paulson, Germany and the IMF had finally to use the bazooka.

But carrying a bazooka is very expensive, and using it is an enormous waste of Capital. Can we afford wasting capital in a world of limited and expensive Capital?
We certainly can’t, but we’re in a systemic crisis, and stopping wasting capital is part of the exit strategy. Unfortunately systemic crisis are long and this is not going to happen tomorrow.

Looking forward to read your opinions.
K. Regards,
Ferran.