Dear,
In a Financial System of limited Capital, efficient Capital Management is the priority.
Efficient Capital Management depends on two magnitudes, Assets Value generation and Risk management (Market, Credit or Operational).
As you can see, we can optimize Capital Management from both sides of the equation; either we increase Value generation or we reduce the Risk of the investment; or even better, we increase Value generation minimizing at the same time the Risk of the investment.
We’ll look at Capital Optimization from the Value generation perspective, and SAP competitive advantages for this in another post, but today we’ll analyze Capital Optimization from the perspective of Risk Optimization.
Reducing the Risk of the investment requires analyzing the expected behavior of Exposures and Counterparts, or utilizing Risk Mitigation Techniques.
Determine effectively the performance of the Bank’s exposures and behavior of the counterparts is a difficult activity, in which statistics calculation, historical patterns and capital markets information can be very useful.
We discussed about SAP Banking components for a holistic Rating and Credit Risk analysis in previous posts
http://sapbank.blogspot.com/2013/05/rating-scoring-and-sap-banking-chapter-i.htmlhttp://sapbank.blogspot.com/2013/06/rating-scoring-and-sap-banking-chapter.htmlhttp://sapbank.blogspot.com/2013/08/implicit-ratings-uncertainty-efficiency.html
We will look at this topic in the future again, but today, we’re going to look at Capital Optimization from the perspective of the Risk mitigation techniques; typically Collaterals and Guarantees.
SAP Banking has an excellent Collaterals Management System, integrated with the SAP Banking Components; Loans Management, Treasury and Risk (for Corporate Banking trade), Reserve for Bad Debts (for Impairment Provisions Calculation) and Bank Analyzer (for Capital Consumption).
The main advantage of SAP-CMS is its integration capacity.
In many Banking legacy systems, their legacy “Collaterals Management System” has been built as a sub-component of the Loans management system. This approach represents a serious limitation from an Architecture Perspective.
In reality, the right or asset which is going to be used in a collateral agreement can collateralize to more than one Loan (or any other exposure), it can exist before the exposure, and in fact, its lifecycle is not dependent on the exposures it’s covering.
A central vision of the value of the Collateral (including potential haircuts) and its charges is mandatory, for assuring that the collateral will fulfill its functions as Risk mitigator.
Take into account that in Banking Legacy systems, we normally find more than one Loans system, with limited integration among them, and minimal (if some) integration with the Corporate and Derivative products’ Banking System.
With this niche architecture, managing centrally the charges supported by the collaterals, and measuring potential hair-cuts on the value of the guarantees, and the subsequent impact on the Bank’s regulatory capital, is “Science Fiction”.
Seven years ago I was working on one of the biggest Bank Analyzer-Basel II implementations for a European Bank. The Bank was performing very well at the time (in the middle of a huge Real Estate bubble I must say),but I still remember how shocked I was when I understood the lack of control on the management of the Bank’s Real Estate Collaterals, which were supposed to mitigate the Credit Risk of the Bank’s exposures.
Actually, when just some months ago, I saw in the news that the Bank had to be bailed out, I was not surprised.
This is the past and we cannot change the past, we have wasted Capital for decades and now the situation is what it is.
Now it's the time to implement the new paradigm and SAP has the technology which makes it possible.
Looking forward to read your opinions.
K. Regards,
Ferran.
In a Financial System of limited Capital, efficient Capital Management is the priority.
Efficient Capital Management depends on two magnitudes, Assets Value generation and Risk management (Market, Credit or Operational).
As you can see, we can optimize Capital Management from both sides of the equation; either we increase Value generation or we reduce the Risk of the investment; or even better, we increase Value generation minimizing at the same time the Risk of the investment.
We’ll look at Capital Optimization from the Value generation perspective, and SAP competitive advantages for this in another post, but today we’ll analyze Capital Optimization from the perspective of Risk Optimization.
Reducing the Risk of the investment requires analyzing the expected behavior of Exposures and Counterparts, or utilizing Risk Mitigation Techniques.
Determine effectively the performance of the Bank’s exposures and behavior of the counterparts is a difficult activity, in which statistics calculation, historical patterns and capital markets information can be very useful.
We discussed about SAP Banking components for a holistic Rating and Credit Risk analysis in previous posts
http://sapbank.blogspot.com/2013/05/rating-scoring-and-sap-banking-chapter-i.htmlhttp://sapbank.blogspot.com/2013/06/rating-scoring-and-sap-banking-chapter.htmlhttp://sapbank.blogspot.com/2013/08/implicit-ratings-uncertainty-efficiency.html
We will look at this topic in the future again, but today, we’re going to look at Capital Optimization from the perspective of the Risk mitigation techniques; typically Collaterals and Guarantees.
SAP Banking has an excellent Collaterals Management System, integrated with the SAP Banking Components; Loans Management, Treasury and Risk (for Corporate Banking trade), Reserve for Bad Debts (for Impairment Provisions Calculation) and Bank Analyzer (for Capital Consumption).
The main advantage of SAP-CMS is its integration capacity.
In many Banking legacy systems, their legacy “Collaterals Management System” has been built as a sub-component of the Loans management system. This approach represents a serious limitation from an Architecture Perspective.
In reality, the right or asset which is going to be used in a collateral agreement can collateralize to more than one Loan (or any other exposure), it can exist before the exposure, and in fact, its lifecycle is not dependent on the exposures it’s covering.
A central vision of the value of the Collateral (including potential haircuts) and its charges is mandatory, for assuring that the collateral will fulfill its functions as Risk mitigator.
Take into account that in Banking Legacy systems, we normally find more than one Loans system, with limited integration among them, and minimal (if some) integration with the Corporate and Derivative products’ Banking System.
With this niche architecture, managing centrally the charges supported by the collaterals, and measuring potential hair-cuts on the value of the guarantees, and the subsequent impact on the Bank’s regulatory capital, is “Science Fiction”.
Seven years ago I was working on one of the biggest Bank Analyzer-Basel II implementations for a European Bank. The Bank was performing very well at the time (in the middle of a huge Real Estate bubble I must say),but I still remember how shocked I was when I understood the lack of control on the management of the Bank’s Real Estate Collaterals, which were supposed to mitigate the Credit Risk of the Bank’s exposures.
Actually, when just some months ago, I saw in the news that the Bank had to be bailed out, I was not surprised.
This is the past and we cannot change the past, we have wasted Capital for decades and now the situation is what it is.
Now it's the time to implement the new paradigm and SAP has the technology which makes it possible.
Looking forward to read your opinions.
K. Regards,
Ferran.
1 comment:
Hi ferren. Very informative blog. I am implementing an end to end banking solution which include both transaction n analytical banking along with account origination n cms. Can you explain in which system we should capture the provisoning process n how it should be treated in bank analyzer for accounting. We are implementing IFRS n local gaap both in bank analyzet.
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