Dear,
As you probably know, in my opinion, this is a Systemic Crisis. Scarcity of Natural Resources and huge debt make it impossible for the World to grow at historical rates.
http://blogs.sap.com/banking/2011/12/07/its-growth-stupid/
Systemic Crisis’ force changes in the economic system foundation, according to the requirements of the new era. Priorities change in systemic crisis, it happened before and it will happen again.
This time, priorities are switching from growth to efficient management of the critical resources. Translated to the Financial System, we’re moving from a Financial System based on Volume to a Financial System based in efficient Capital Management.
Capital is the main resource of the Financial System, let’s see why.
The whole Financial System relies on trust, I deposit money in the bank and I expect the bank will give me my money back, plus some interests. But on the other side, the bank has to allocate money in other assets (investments or loans), and it also expects to recover the investments, plus some dividends or interests.
This is very important, as the Financial System is not sustained by titanium cables but by trust, trust is the main asset of the Financial System, and once broken it’s very difficult to fix it.
For protecting trust, banks have to offer a special guarantee to its lenders, that guarantee is the Regulatory Capital.
Regulatory Capital is determined according to the parameters of some international agreements called Basel agreements; Basel I, Basel II and most recently Basel III.
http://www.bis.org/bcbs/basel3.htm
Every solvency agreement is an evolution of the previous one, but they all define the Regulatory Capital as a percentage of the Bank’s Risk Weighted Assets.
Risk Weighted Assets depend on the Probability of Default of the Bank’s counterparts, and again, this is a sensitive matter.
When I run probabilistic calculations, I do it because there’s uncertainty; the information required for making the event deterministic is not available.
For Financial Assets, the missing information is in the future; I make the investment today, but only in the future I will know if my counterpart will honor his obligations.
As I don’t know what will happen in the future I use statistics for trying to find it out.
Investors can calculate the Probability of Default of the counterpart, by measuring historical default rates of counterparts similar to him, and statistical tendencies.
The whole construction depends on the economic growth. If world’s economy is not growing; Probabilities of Default, Risk Weighted assets and Capital Requirements of the Banks will grow. On the other hand, as default rates grow, Bank’s losses increase, reducing available capital.
Reducing available Capital and increasing Capital Requirements are making banks undercapitalized, even the biggest ones.
http://www.reuters.com/article/2013/06/14/us-financial-regulation-deutsche-idUSBRE95D0X620130614
That’s the foundation of the Systemic Change; Capital is the most critical resource of the Financial System (actually the whole economy) and now is very scarce. Consequently, it will have to be managed very efficiently.
Efficient Capital Management emerges as the most critical activity for the Financial System; I've worked for years in a Capital Optimization model based on SAP Software, I’ll present it to all of you in some weeks.
http://blogs.sap.com/banking/2012/02/01/capital-optimization-sap-hana/
Looking forward to read your opinions.
K. Regards,
Ferran.
As you probably know, in my opinion, this is a Systemic Crisis. Scarcity of Natural Resources and huge debt make it impossible for the World to grow at historical rates.
http://blogs.sap.com/banking/2011/12/07/its-growth-stupid/
Systemic Crisis’ force changes in the economic system foundation, according to the requirements of the new era. Priorities change in systemic crisis, it happened before and it will happen again.
This time, priorities are switching from growth to efficient management of the critical resources. Translated to the Financial System, we’re moving from a Financial System based on Volume to a Financial System based in efficient Capital Management.
Capital is the main resource of the Financial System, let’s see why.
The whole Financial System relies on trust, I deposit money in the bank and I expect the bank will give me my money back, plus some interests. But on the other side, the bank has to allocate money in other assets (investments or loans), and it also expects to recover the investments, plus some dividends or interests.
This is very important, as the Financial System is not sustained by titanium cables but by trust, trust is the main asset of the Financial System, and once broken it’s very difficult to fix it.
For protecting trust, banks have to offer a special guarantee to its lenders, that guarantee is the Regulatory Capital.
Regulatory Capital is determined according to the parameters of some international agreements called Basel agreements; Basel I, Basel II and most recently Basel III.
http://www.bis.org/bcbs/basel3.htm
Every solvency agreement is an evolution of the previous one, but they all define the Regulatory Capital as a percentage of the Bank’s Risk Weighted Assets.
Risk Weighted Assets depend on the Probability of Default of the Bank’s counterparts, and again, this is a sensitive matter.
When I run probabilistic calculations, I do it because there’s uncertainty; the information required for making the event deterministic is not available.
For Financial Assets, the missing information is in the future; I make the investment today, but only in the future I will know if my counterpart will honor his obligations.
As I don’t know what will happen in the future I use statistics for trying to find it out.
Investors can calculate the Probability of Default of the counterpart, by measuring historical default rates of counterparts similar to him, and statistical tendencies.
The whole construction depends on the economic growth. If world’s economy is not growing; Probabilities of Default, Risk Weighted assets and Capital Requirements of the Banks will grow. On the other hand, as default rates grow, Bank’s losses increase, reducing available capital.
Reducing available Capital and increasing Capital Requirements are making banks undercapitalized, even the biggest ones.
http://www.reuters.com/article/2013/06/14/us-financial-regulation-deutsche-idUSBRE95D0X620130614
That’s the foundation of the Systemic Change; Capital is the most critical resource of the Financial System (actually the whole economy) and now is very scarce. Consequently, it will have to be managed very efficiently.
Efficient Capital Management emerges as the most critical activity for the Financial System; I've worked for years in a Capital Optimization model based on SAP Software, I’ll present it to all of you in some weeks.
http://blogs.sap.com/banking/2012/02/01/capital-optimization-sap-hana/
Looking forward to read your opinions.
K. Regards,
Ferran.
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