Why SAP Banking?

Dear,
Just 5 years ago (April 2008) I started this SAP Banking community.

At the time we were in a booming economy; the subprime crisis just started some months before, but their real effects wouldn't be fully visible till the Lehman Brother collapse, and the governments rescue of the Financial System on October 2008.

By then, I had understood that this was not another conjunctural crisis, like 1987, 1991, 2000, etc. This one was systemic and the center was the Financial System.

The scarcity of the natural resources, environmental damages and Financial Debts had achieved levels that made impossible to grow at the same rates that western economies enjoyed since the end of the Second World War.

By the way, I wrote about it months ago.

http://blogs.sap.com/banking/2011/12/07/its-growth-stupid/

Living in an economy of limited growth is a very big challenge for the Financial System. The whole Financial System relies in a very simple concept; I invest (or lend) capital to somebody, and I trust that he will pay me back, the invested capital plus some dividends (or interests).

But if I doubt that he will fulfill his obligations, I’ll be reluctant to invest, and without investment (or lending) there’s no Financial System. It sounds logic then, that in a world of limited growth, trust is also limited, and Capital is scarce.

If Capital is scarce, and without capital there’s no modern economy, efficient Capital management is the most critical, of the economic activities.

I've worked as SAP consultant since 1996; I've seen SAP optimizing processes in many industries for 17 years, but I always wondered why SAP presence in Banking processes was so limited. In my opinion, because the Financial System was not oriented to efficient management of Capital.

For decades Capital had been abundant and the objective was growth, no matter the amount of Capital consumed for fueling that growth.

And then, with the starting of the Financial and Economic crisis, we suddenly discovered that Capital is limited, and that’s the foundation of the Systemic change; from a Financial System based in volume to a Financial System based in efficient Capital management.

SAP is about efficiency and control, and with SAP Banking, we can build an Information System, which positions efficient Capital management at the center of the Bank’s activities. Describing and discussing how to do it, it’s the main reason why I founded this community.

Thanks to all who have joined me during this time, and I hope we keep together for 5 more years.

K. Regards,
Ferran.

Understanding Profit Analyzer – Chapter II

Dear,
When we look at BA-Profit Analyzer it's very important to understand that BA is a piece that must fit in the puzzle of the SAP Management Accounting components.

The objective is having a complete description of the revenues and costs in the Bank, and how to manage them efficiently.

An interesting matter, it’s the concept of Direct and Indirect Costs and Revenues, and how to manage them in BA-Profit Analyzer and SAP Management Accounting.

In AFI and Profit Analyzer (according to the IFMA, Profit Analyzer works as an enhancement of AFI) we calculate and manage direct costs, either because they're really direct (for instance, write-offs, or funding costs of a Loan) or we have “made them direct” by using a Tariff (standard costs in general; for instance, process costs).

Consequently, the costs and revenues managed in Bank Analyzer exist because the Financial Transaction (or Financial Instrument) linked to them exists. Obviously I cannot write-off the interests of a non-existing loan.

This is clear for the direct costs and revenues, but a little bit confusing for standard costs (like process costs); for analyzing them we can take advantage of SAP integrated vision. Let me explain it with an example.

Taking advantage of the multidimensional approach of the Bank Analyzer Financial Database, we build a cost object (combination of RDL Characteristics) which will collect the costs and revenues calculated by AFI and Profit Analyzer.

This combination of characteristics (or a subset of them) will be transferred to the General Ledger, through the General Ledger Collector, building the Operating Segment for reporting, required by IFRS 8.

http://www.ifrs.org/news/press-releases/Pages/iasb-issues-convergence-standard-on-segment-reporting.aspx


When we say that the process costs of a current account are 1$/month, we're making a hypothesis; actually we're saying that a fair distribution of all the indirect costs necessary to process and maintain the account (Human Resources, IT Amortization costs, Real
Estate Costs, Electricity, Telephone, etc.) will give us as a result, 1$/month.

Those costs are not direct, as they will remain even when the Loan is fully repaid and not-active anymore (obviously, we're not firing any employee when a current account is closed).


The question is; what’s the validity of that tariff, if we don’t reconcile it with the fair distribution of the real costs? And then, what's the validity of the costs analysis?


If we transfer the costs and revenues of the Operating Segment of the General Ledger (coming from BA) in the Profitability Analysis module, we'll have a full Profit and Losses representation (including the process costs calculated with tariffs in BA) by Operating Segment.

On the other hand, the real Process Costs, which have been posted on the Cost Objects of the SAP-ECC Management Accounting Module (Cost Centers, Internal Orders, etc.), will be finally posted in a PA Object through flows of Settlement and Distribution Cycles.

If we define smartly a common subset of characteristics in the Operating Segment and the SAP-ECC Operating Concern, we will be able of comparing and reconciling the hypothetical process costs that we used for defining the process costs tariff in BA-Profit Analyzer, with
the real costs collected by the integrated model of the ECC-Management Accounting Model.

The integrated vision of SAP is offering us amazing opportunities of managing the banks resources efficiently, but we need a clear and robust architecture definition for supporting this integrated vision.

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

Bank Analyzer – ALM functionalities and Roadmap.

Dear,

Recently, I was invited to make a presentation about Analytical Banking; particularly, about the ALM capabilities of Bank Analyzer.

Today, SAP BA does not include the necessary functionalities for being considered an ALM solution, but this does not mean that it shouldn’t be seriously considered in an ALM roadmap.

In fact, SAP has the best value proposition for building, not only a very powerful ALM solution, but a Capital and Liquidity Optimizer; let’s see why.

Building an ALM solution requires five blocks of functionalities.

- Transactional Banking data cleansing and storage. Covered by the ETL functionalities of Netweaver and the BA - Source Data Layer.

- Counterparty Risk Analysis. Covered by the CRA module of BA.

- Market Risk Analysis. Covered (with limitations) by the Strategy Analyzer module of BA.

- Liquidity Analysis. Covered by Liquidity Risk Management powered by SAP HANA.

- ALM Simulation functionalities (Simulated Transactions, Market Data Generation, etc.). Not yet available.


If the question was; “is SAP BA an ALM module?”

Maybe the answer should be no.

But if the question was; “is SAP BA the best option to consider in an ALM roadmap?”

Then the answer could be yes. There’re several reasons for justifying this answer.

- Four out of the five necessary building blocks for a robust ALM solution are already covered by BA. Three of them are completely covered; the fourth (Market Risk) is covered with some limitations.

- Building a strong ALM solution requires a multi-purpose and flexible architecture, capable of managing Accounting, Credit, Market and Liquidity Risk Data in an integrated way. There’s no better architecture for this than the Integrated Financial and Risk Architecture of BA.

- Accepting that the ALM simulation functionalities are not available yet in BA, this does not mean that they’re not going to be available in future releases (maybe even sooner than expected).

Let’s focus on the last point, as it seems to be the weak point of Bank Analyzer, in front of other competitors like Sunguard.

Implementing the ALM simulation functionalities must be the last step in a coherent ALM and Capital Optimization Roadmap. It would be nonsense to try to build ALM simulation scenarios if we haven’t built a robust Accounting and Liquidity System. And the Accounting and Liquidity functionalities must be supported by a strong foundation of good quality Transactional Data.

Achieving this stage requires a full implementation project of Accounting for Financial Instruments and the complete modelization of the necessary Primary Objects in the SDL, plus all the ETL transformations. This is a challenging project that will take a while to bring to a successful go-live.

During that time, it is likely that SAP will enhance the ALM simulation functionalities of BA.

I implemented the ALM solution of SEM-Banking in the past; and based on that experience, I think than enhancing the Strategy Analyzer module of Bank Analyzer and taking advantage of the ALM functionalities of SEM Banking, rebuilt over the IFRA Architecture, it will make Bank Analyzer a very robust, best of breed ALM solution.

SAP has the know-how; they just have to re-use it for BA.

The real issue is the scarcity of consultancy resources capable of implementing and explaining BA, which can delay the roadmap, even more than what SAP will take to develop the ALM Simulation functionalities in BA.

Again, the challenge is not developing great software, but explaining why is so great and making it work.

Regards,

Ferran.

Lessons from Cyprus Crisis.

Dear community members,

Cyprus crisis is a very interesting case and gives many indications
about the rules which are driving the new Financial System that will
emerge as a consequence of the current Systemic Crisis.

- Responsibility of the depositors. From now one, deposits can
suffer significant write-offs, and consequently, evaluating the
solvency of a Bank is not the responsibility of investors but also
savers.

- Increasing the pressure on Banks for improve transparency and
increase their solvency ratios. 1 year ago, we discussed that
Governments and Banks executives are playing a prisoners dilemma game,
for forcing the banks to increase their transparency and solvency
ratios. Fear of depositors to lose their savings is a good driver for
“putting the banks executives on track”. Those banks which don’t prove
their solvency are on risk of losing clients very quickly.

http://blogs.sap.com/banking/2012/03/16/banks-governments-and-prisoners-dilemma/

- The Role of Capital Controls in the new Financial System.

Most of the technical and political explanations I’ve read in the last
days about the Capital controls in the Cyprus crisis describe the
measure as a hard, temporary restriction for preventing panic and
Banking Run.

http://www.ft.com/cms/s/0/9901f6ce-96f2-11e2-a77c-00144feabdc0.html#axzz2POftrxWU

In my opinion there’s something more important than preventing a
Banking Run in Cyprus; Capital Controls are going to play a key
role in the regulatory framework of the future Financial System.

I strongly recommend the article of Dr. Paul Krugman (2008 Nobel Prize
in Economics) about this particular matter.

http://www.nytimes.com/2013/03/25/opinion/krugman-hot-money-blues.html?_r=0

Professor Krugman justifies Capital Controls as a good prevention of
speculative bubbles and he couldn’t be more right.

On the other hand, Dr. Krugman is a great advocate of sovereign
currency policies and strong critic of the Eurozone construction
failures.

When Dr. Krugman, as many other reputed economists, blame the Euro
(currency) as the responsible of the Financial Crisis in Europe, they
mention that integrating in the same currency area, economies with
different GDP structures tend to generate bubbles in those economies
with lower productivity. Again, absolutely true, in common currency
areas prices tend to align, but that’s not necessarily the case for
productivities.

If the different economies have different currencies, low productivity
economies can recover their productivity by currency devaluation, but
if they’re tied to a single currency (EURO), they cannot.

Consequently, how can those low productivity economies increase their
productivity?

The answer is internal devaluation, and that’s exactly the role that
Capital Controls are going to play.

Today, we don’t have a single Euro anymore. We cannot pretend that a
Euro in Frankfurt has the same value than a Euro in Nicosia, when the
Euro in Germany is much more liquid than the Euro in Cyprus. They have
the same Nominal Value but the Euro in Cyprus is suffering a hair-cut
in its value as a consequence of its illiquidity.

This is “the facto” the currency devaluation that will increase Cyprus
economy productivity.

In the meantime Cyprus population is going to be severely
impoverished; but nobody said that maintaining high standards of living, was the exit strategy of this Systemic Crisis.

The exit strategy of this Systemic Crisis is Efficient Capital Management, and that’s why capital controls are going to be implemented in Cyprus, and other places.

Looking forward to read your opinions.

K. Regards,

Ferran.