Single Euro Payments Area. Market concentration and SAP Banking opportunities.

Dear,

By August the 1st, 2014 all the Banking payments in Europe should be processed with the unified format of the Single Euro Payments Area.

The Single Euro Payments Area is an initiative of the European Union with the objective of simplifying the process of cross-border bank transfers denominated in euro, by creating common payment instruments in its area of application.

http://ec.europa.eu/internal_market/payments/sepa/index_en.htm

The final objective is turning the fragmented national banking markets of the Euro-zone into a single domestic one.

Most of the European credit institutions have successfully enhanced their payment systems on time.

http://www.bankingtech.com/210552/eba-clearing-reports-uptick-in-sepa-payments/

But SEPA's full implementation is just the beginning of this unification process; European authorities are already planning additional regulations on credit cards, risk management, etc.

By the autumn of this year the European Central Bank will become the principal supervisor of the credit institutions of the area.

http://www.ecb.europa.eu/ssm/html/index.en.html

The homogenization of processes and regulatory framework is reducing cross-border barriers and bringing new competitors into the domestic markets.

At the same time we’ll see how limited growth is driving margins down and increasing pressure for costs reduction.

In this scenario, a critical competitive advantage is developing economies of scale, standardizing processes and technology.

That’s the idea, efficiency, costs reduction. Once again, the driver of the new financial system emerging of this Financial Crisis will not be driven by volume, but by efficient management of the resources.

Additionally, capital scarcity due to the higher Capital requirements of Basel III, collateral requirements in the derivatives market, and limited growth of the developed economies will bring higher competition on the Capital Markets; and ultimately, new waves of concentration amongst financial institutions.

Does SAP Banking have the answer to these challenges?

Of course it does; SAP has demonstrated in the last 40 years to have the know-how for becoming the world’s leader on deploying integrated, cross-border, multi-language, multi-currency and consolidated information systems.

The consolidated approach is embedded in the SAP Banking architecture from many perspectives.

ECC system deployed multi-company, multi-currency functionalities many years ago, supporting smoothly integrated cross-border business process.

This approach is also incorporated to the SAP Banking business suite; for instance, Banking Services has no restrictions for supporting multi-company, multi-currency and cross-border functionalities; and Bank Analyzer, in combination with Business Planning and Consolidation, and the reporting capabilities of Business Information Warehouse has the capabilities for offering the consolidated vision of the Capital/Risk and Accounting position of a globalized Financial Group.

Keep the word in mind, Assets Consolidation.

Since 2008 crisis, and in spite of the bad reputation of the “Too Big to Fail”, we see that the number of players is being reduced, consolidating assets in bigger and bigger financial conglomerates, reducing operational costs and increasing their systemic influence.

Is there any difference between the old “Too Big to Fail” and the new “Consolidated” model?

Yes there is, the old model was driven by volume and the new one will be driven by efficient Capital Management. Size matters, but it’s not the key point here.

But this post has become too long, we’ll discuss about it another week.

Looking forward to read your opinions.

K. Regards,

Ferran.

Margin Debt. Subprime Crisis 2.0 - Chapter II

Dear,
Expansionary cycles of low interest rates and liquidity injections have the tendency of inflating economic bubbles. As the bubble inflates, positive perception of the investors keeps interest rates low, increasing leverage and rising markets valuation. 

Even when the spreads rise, ending the expansionary cycle, we don’t know how big the bubble is, we only will when the correction is complete, and the process can take months, even years.

It happened before and it will happen again. 

Remember that the subprime crisis started on February 2007 and we were not aware of its severity till September 2008.

We saw a couple of weeks ago, that some emerging economies have started the correction, as a consequence of the different perception on the interest rates evolution, triggered by US FED tapering.

http://sapbank.blogspot.com/2014/02/subprime-crisis-20.html

As in 2007, the general perception is that this is not that serious, US economy is performing well, and the Chinese real estate crisis is far from here.
Be careful with that feeling, don´t forget we’re in a globalized economy, in the middle of a systemic crisis; consequently what happens to one affects the system. 

Different economies make the crisis take different shapes, but the root cause is common, Capital Scarcity; and the solution has to be also global and coordinated.

Let’s look now at the symptoms in the developed economies.

A very interesting one is the total Margin debt level, which hit a historical record of $451B last January

http://video.foxbusiness.com/v/3323760203001/margin-debt-levels-hit-record-451b-in-january/#sp=show-clips

For those of you who are not familiar with the term, Margin Debt is the dollar value of securities purchased on margin within an account, and it’s a clear indicator of leverage levels and investors feelings. As the investors have positive feelings about the market evolution, they increase their leverage, buying securities at margin.

If the market perception changes, for instance, triggered by a rise of the interest rates, this huge margin debt will become a very large number of margin calls coming due, increasing the selling pressure and bursting the bubble. 

2008 subprime crisis was inflated by a long period of low interest rates; when the bubble burst, and with the intention of avoiding a global depression, Central Banks reduced interest rates, and injected huge amounts of liquidity in the Financial System.

Injecting liquidity for avoiding a depression is an old solution which worked in the past, when capital was abundant. 

Unfortunately, today we are in a new era of capital scarcity; a new era coming with new challenges, which require new strategies. In a capital scarce environment, injecting liquidity for preventing a depression, triggered by a debt crisis, it just makes the debt crisis bigger.

Someday we´ll see, that what Central Banks have done during the last five years, is trying to avoid a global fire with gasoline.

Last five years liquidity injections have delayed the depression and inflated a new bubble. 

When the new bubble bursts, it will be visible that capital is very scarce, even more scarce than five years ago.

The only alternative is building a new Financial System, with the priority of making efficient use of Capital, but transforming the Financial System is a herculean effort, and that´s why we are in a systemic crisis.

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

After ten years, now it's the time for SAP Banking

Dear,

Last week I talked to a friend who was one of the first Bank Analyzer consultants in Europe, but he moved to other businesses years ago.

He told me that SAP Banking has been just a hope for more than 10 years and he thinks that the situation is not different today.

I disagree; today we’re confronting a systemic crisis, forcing a much more stringent regulation, which is driving a profound change in the Financial System, from a business model based in Volume to a business model based in efficient Capital Management.

Today, and in the next years, SAP AG and the whole ecosystem of partners and consultants, have the opportunity to play a principal role in the systemic change,

During this month, we’ll see the strategy on the Assets Quality Review that the ECB is performing during 2014 in the European Banks. 

http://www.reuters.com/article/2014/02/03/us-ecb-banks-idUSBREA1200320140203

There have been previous audits of the solvency of the European Banking System, giving guarantees on the solvency of the Irish, Spanish, British, German, Greek banks…, and we discovered some months later that they were severely under-capitalized and had to be bailed-out.

This time is going to be different, it has to be different; today financial authorities have the protocol for shutting-down a non viable bank that has been “successfully” tested in Cyprus. They have the book and they’re going to use it.

After that, we all will be aware of what Capital means, what the consequences of its scarcity are and why it has to be managed efficiently.

For the last 7 years the center of my interests have been Capital Optimization; a wide discipline with implications in every corner of the financial system. You can find some ideas here.

http://blogs.sap.com/banking/tag/capital-optimization/

But the posts above are a very tiny description of the endeavor. From time to time I’m invited by some senior executives of Banks, (who have been reading my posts for a while, or know somebody who does) to share and exchange some ideas about Capital Optimization.

When I explained them that Capital Optimization is much more than Portfolio Management, and extend its implications to every activity, (from Loans Origination to Collateral Management, from Securitization to Payments Claim) requiring to be managed in a integrated model, they understand the size of the challenge and show their concerns about the feasibility of the objective.

I also understand the difficulties, but I’m also aware of the implications of avoiding the transformation. 

For those of you, who think I’m wrong, please remember the words of Michel Barnier (Member of the European Commission responsible for the Internal Market and Services).

 

"We need a new deal between financial regulation and society. A deal in which financial services are back at the service of the real economy. And at the service of citizens. Citizens who are also taxpayers. Those same taxpayers who are paying the bill of bailing out the banks. Citizens and taxpayers who have lost all trust in the financial system. Who don’t believe it works for them. And who won't forgive us if we don’t learn all the lessons of the crisis. And change what needs to be changed in the financial sector.This must be the starting point of any "new deal" between the world of finance and society: restoring trust"

 

 http://europa.eu/rapid/press-release_SPEECH-10-178_en.htm?locale=en

And now, tell me who can offer the technology infrastructure to put Capital at the center of the financial system, reflecting clearly the implications of the peripheral activities; from determining the Free Line of a non-fully disbursed loan in Banking Services, to reduce the rating of a counterpart, after an IRB estimation in the Historical Database of Bank Analyzer.

Explaining why SAP is the only software offering this holistic approach is the reason why I founded this community and the main objective of every post.

Looking forward to read your opinions.

K. Regards,

Ferran.