Dear community members,
Those who have known me for some years know that in my opinion, the Financial Crisis is just the translation to the Financial System of a Systemic Crisis. The root cause of the Systemic Crisis is the scarcity of resources capable of generating economic growth; Oil, Natural Resources in general, Financial Solvency, etc.
What is the answer to a global scenario of scarcity of critical resources?
Efficient management of those resources, but the question remains, what’s the business model for managing efficiently those resources?
In my opinion the best answer to this this problem was pronounced years ago by the physicist Eliyahu Moshe Goldratt
In his Theory of Constraints, he described how all the Systems have constraints and bottlenecks. And only by managing the bottlenecks of the System we can maximize its output, minimizing at the same time the resources consumption (in my opinion, this is the most brilliant modelization of the efficiency paradigm).
By assigning resources to a process which is not a critical bottleneck, we will not improve the output, and consequently we will be wasting scarce resources.
Let’s look at the Financial System now. What are the critical resources of any Financial Institution?
1) Capital.
2) Liquidity.
Any Financial Institution has to fulfill the regulatory requirements of Capital (percentage of its Risk Weighted Assets) and Liquidity.
Now, let’s look at the bottlenecks.
A Banks portfolio is just the aggregation of many micro-portfolios with homogeneous characteristics (level of risk, same geographical region, type of investment …) in a multidimensional matrix of analytical dimensions that the Bank’s managers use for managing the Bank’s portfolio.
Each micro-portfolio has:
- A potential return of the Investment.
- Consumes capital.
- Consumes or Generates Liquidity
Weighting the Potential Profit of every micro-portfolio by the Capital and Liquidity that the micro-portfolio will consume, will let the Bank’s managers prioritize those micro-portfolios in which the Bank can maximize the Profit minimizing the consumption of Capital and Liquidity.
That’s the answer to the new scenario for the Financial System in which Capital (Solvency) is, and it’s going to be for many years, a very scarce and Critical Resource.
In my opinion, combining the capacity of the Bank Analyzer-Integrated Financial and Risk Architecture and the In-Memory Computing Capabilities of HANA, positions SAP in the best place for building a Capital & Liquidity optimizer like I’ve tried to describe in this post.
In case you have interest, I also gave some ideas about it in another post.
Looking forward to read your opinions.
Kindest Regards,
Ferran.
1 comment:
What an interesting post. I have been doing research J.S. Oliver capital management and what they actually do. I am so glad I came across your post. It was so helpful and now I feel like I fully understand what capital management and asset management is. Thanks so much for sharing.
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