Dear,
Capital Scarcity is the main threat for the financial system, and it is driving it from a Business Model based on Volume to a Business Model based on Efficient Capital Management.
Efficient management has some requirements; the main one is providing the Banks’ managers and auditors with a holistic vision of all Bank’s rights (Assets) and obligations (Liabilities).
Unfortunately, in the traditional accounting systems, some of the Banks’ rights don’t have full recognition, when they have the same capacity of value generation than other, fully recognized assets.
A quite interesting case is the representation of the Assets Protection Schemes (APS’s), commonly used since the starting of the Financial Crisis on 2008.
Simplifying, the basic idea under APS’s is the following; Banks on financial difficulties were recapitalized by receiving special guarantees from the government. Those guarantees protected them from potential losses in damaged assets.
APS’s directly improved the solvency of rescued banks, giving them access to the capital markets where they would get liquidity, and provided them with free-capital, that they were able of allocating, according to the strategy defined by Bank’s executives.
Of course, the transfer of solvency came with a price; as Banks improved their solvency, public finances suffered the losses, represented by reductions in their solvency ratings.
Rescued packages have offered some stability to the Financial System, but there’re some doubts about the long term effectiveness of the program; particularly, when it comes to the good utilization of those public funds. At least partially, the reason has to do with the capabilities of the Bank’s information systems, for tracking the allocation of the public funds transferred to them, and the way those rights were represented.
APS’s have been modeled in most of Bank’s Information Systems as collaterals of the damaged assets. As the risky assets are now highly collateralized, the banks have been able of using them in securitization processes or repo-style transactions, in exchange for liquidity.
On the other hand APS’s can also be modeled as Over-the-Counter Credit Derivatives (Options), capable of hedging the Default Risk of the Banks’ damaged Assets.
While improvement of the solvency position is recognized by both approaches, the value of the transferred funds is not equally represented in the balance sheet. With the first approach; the impact of an over-collateralized asset in the balance sheet could be minimal, as the collateral value is represented in books when the collateralized asset becomes impaired.
On the other hand; with the second approach, the Over-the-Counter Credit Derivatives Fair Value have full recognition from the time it is acquired, including any potential Hedge-Accounting adjustment.
As mentioned at the beginning of this post, the objective should be achieving a holistic representation of all Bank’s rights and obligations; supported by functionalities, capable of tracking capital consumption, and actual return of the allocated capital.
Giving visibility to capital and its utilization, is the first step for building a system which supports its efficient management. In my opinion, Accounting standards and the flat structure of the General Ledger don’t provide the best info-structure for offering that visibility.
On the contrary, the Integrated Financial and Risk Architecture of the Bank Analyzer offers the required holistic approach, representing the underlines, risk of assets, and their expected and actual return. Additionally, their multi-accounting system functionalities, provides the capacity of reporting the bank’s position according to multiple approaches.
Looking forward to read your opinions.
K. Regards,
Ferran.
Capital Scarcity is the main threat for the financial system, and it is driving it from a Business Model based on Volume to a Business Model based on Efficient Capital Management.
Efficient management has some requirements; the main one is providing the Banks’ managers and auditors with a holistic vision of all Bank’s rights (Assets) and obligations (Liabilities).
Unfortunately, in the traditional accounting systems, some of the Banks’ rights don’t have full recognition, when they have the same capacity of value generation than other, fully recognized assets.
A quite interesting case is the representation of the Assets Protection Schemes (APS’s), commonly used since the starting of the Financial Crisis on 2008.
Simplifying, the basic idea under APS’s is the following; Banks on financial difficulties were recapitalized by receiving special guarantees from the government. Those guarantees protected them from potential losses in damaged assets.
APS’s directly improved the solvency of rescued banks, giving them access to the capital markets where they would get liquidity, and provided them with free-capital, that they were able of allocating, according to the strategy defined by Bank’s executives.
Of course, the transfer of solvency came with a price; as Banks improved their solvency, public finances suffered the losses, represented by reductions in their solvency ratings.
Rescued packages have offered some stability to the Financial System, but there’re some doubts about the long term effectiveness of the program; particularly, when it comes to the good utilization of those public funds. At least partially, the reason has to do with the capabilities of the Bank’s information systems, for tracking the allocation of the public funds transferred to them, and the way those rights were represented.
APS’s have been modeled in most of Bank’s Information Systems as collaterals of the damaged assets. As the risky assets are now highly collateralized, the banks have been able of using them in securitization processes or repo-style transactions, in exchange for liquidity.
On the other hand APS’s can also be modeled as Over-the-Counter Credit Derivatives (Options), capable of hedging the Default Risk of the Banks’ damaged Assets.
While improvement of the solvency position is recognized by both approaches, the value of the transferred funds is not equally represented in the balance sheet. With the first approach; the impact of an over-collateralized asset in the balance sheet could be minimal, as the collateral value is represented in books when the collateralized asset becomes impaired.
On the other hand; with the second approach, the Over-the-Counter Credit Derivatives Fair Value have full recognition from the time it is acquired, including any potential Hedge-Accounting adjustment.
As mentioned at the beginning of this post, the objective should be achieving a holistic representation of all Bank’s rights and obligations; supported by functionalities, capable of tracking capital consumption, and actual return of the allocated capital.
Giving visibility to capital and its utilization, is the first step for building a system which supports its efficient management. In my opinion, Accounting standards and the flat structure of the General Ledger don’t provide the best info-structure for offering that visibility.
On the contrary, the Integrated Financial and Risk Architecture of the Bank Analyzer offers the required holistic approach, representing the underlines, risk of assets, and their expected and actual return. Additionally, their multi-accounting system functionalities, provides the capacity of reporting the bank’s position according to multiple approaches.
Looking forward to read your opinions.
K. Regards,
Ferran.
No comments:
Post a Comment