Liquidity and Capital Optimization with SAP Mobility and Bank Analyzer.

Dear,
A former client released some weeks a new Banking mobility platform for tablets and smart-phones, and I had the opportunity of testing the Apps.

The mobile applications provide the customers with the capacity of accessing to their bank accounts, checking balances, run credit cards payments, etc.

It also provides a framework of tools with graphical representations of the accounts movements and credit-cards consumption.

In general it´s a useful tool, and it will provide the bank's customers a self-banking system, reducing the number of interactions with the branch or phone-banking.

For the bank, the technology offers an opportunity of improving the customer service, reducing operational costs at the same time.

This is important, but in my opinion, it´s not even close to the real opportunities of the mobility paradigm.

Mobility offers a 24/7, direct, bidirectional and formalized communication channel between the bank and its clients, virtually in any situation and place. This communication channel opens the gate for new business processes that must be aligned with a successful strategy.

As you know, top priority of the new Financial System is efficient Capital and Liquidity management.

The challenge for mobility consultants and architects is designing and describing new processes supporting Capital and Liquidity optimization.

Mobility offers many opportunities for capital and liquidity optimization, let´s look at some of them.

Not utilized free-lines consume capital and they don´t give any benefit to the customer or the bank. This is particularly relevant in revolving credits (like credit cards).

Typically credit cards have the same credit limit during the year, while the customer consumption behavior can present seasonality patterns. The bank and the customer can agree variable credit limits of the credit cards, according to the customer monthly consumption plans. By adjusting the commitment amount to the client's consumption expectations, the bank can reduce the free-line and consequently the capital consumption.

In a similar way, if the clients provide their expected liquidity requests to the bank, the treasury department can generate simulated transactions in the bank's Assets and Liability systems.

Having this information in advance would be very useful for the banks liquidity planners, as they can plan the liquidity requirements more efficiently, getting the necessary liquidity at better rates, or preparing the investment of potential excesses of cash.

Clients with potential exposures or requests in foreign currency, could also plan their foreign currency requirements or Forex hedging transactions in the mobility banking tool. With this information, the bank can also better clear their exposures on foreign currency. Imagine, for instance, that the client is planning a trip to a foreign country or he´s expecting payments in foreign currency.

All this data, provided by the collaboration scenarios, is only useful if it´s processed and converted in information. The conversion requires a central representation of the bank´s exposures (real and simulated), capital and liquidity positions.

Bank Analyzer will support the bank´s managers in their liquidity and capital planning activities, using the information provided by the mobility channel.

The model requires a seamless integration between the banking mobility system and the capital management system.

The required level of integration only can be offered with the holistic vision of SAP, which is the only banking suite offering all the components of the value chain; from the mobility Apps to the capital and liquidity management engine.

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

Why Barclays is a good example of the Systemic Change?

Dear,
Some weeks ago it was announced that Barclays was going to reduce significantly its Investment Banking division and firing 7500 employees.

http://www.bloomberg.com/news/2014-04-23/barclays-may-cut-7-500-at-investment-bank-bernstein-says.html

Furthermore, the bank also announced that the new bank´s strategy will bring a workforce reduction of 19000 employees by 2016

http://www.theguardian.com/business/2014/may/08/barclays-to-cut-19000-jobs-scale-back-investment-bank-antony-jenkins

We also read that the Bank will park 90 billion Euros worth of risk-weighted assets from the investment bank in a bad bank.

http://www.reuters.com/article/2014/05/08/barclays-restructuring-idUSL6N0NU1LJ20140508

And finally, Barclays Chief Executive Officer of the Americas division and top-paid executive, Hugh McGee resigned some weeks ago because the bank´s focus is going to be regulation.

“My focus has always been on clients, but given the need for Barclays leadership to focus on regulatory issues for the foreseeable future, I have decided that it is time for me to move on”

http://dealbook.nytimes.com/2014/04/29/head-of-barclays-u-s-business-to-step-down/?_php=true&_type=blogs&_r=0

For understanding the recent events, we have to look at Barclays recent history.

On September 2008, Barclays tried to purchase the investment-banking and trading divisions of Lehman Brothers, but the acquisition was not approved by the British regulatory authorities.

As you know, Lehman filed for bankruptcy on September 15, 2008.

On September 20, 2008 Barclays acquired the core business of Lehman Brothers with the approval of US Bankruptcy Court, becoming a top player, in the selected club of Wall Street´s investment banks.

After 2008 financial crisis, following the governments rescue packages and central banks liquidity injections, results looked very positive for investment banks, including Barclays.

http://online.wsj.com/news/articles/SB10001424052748703581204576033514054189044

But unfortunately, this was never a conjunctural crisis, as others that the capitalistic suffered periodically on the 20th century.

This is a systemic crisis and is forcing a systemic change of the financial system.

Last year's Barclays' strategy has been making the bank growing, increasing its size and volume.

At the same time, the bank increased its Risk Weighted Assets and consumed Capital.

In the old model this would have been a successful strategy, but this is not the case anymore.

In the new model, a successful strategy must not target volume, but efficient capital management, this is the painful lesson that Barclays is learning today.

When Barclays executives decide to park 90 billion Euros in a bad bank (400 billion pounds on the next 3 years), they´re trying to reduce the capital consumed by those assets.

They know that capital is scarce and it will be more scarce in the next future. Consequently, reducing capital consumption becomes Barclays top priority.

Some days ago, I discussed about this with a good friend, who has an executive position in a middle size bank; he told me that the scenario is scary.

I agree, systemic changes can be scary; but they also come with opportunities.

SAP Banking is very well positioned to support banks transformation, according to the new challenges of the systemic change.

I´ve personally worked in the design of a Capital Optimization model, supported by Bank Analyzer technology, that will offer an answer to some of the challenges of the new financial system.

Scary? Maybe

Pessimistic? Never

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

Comprehensive Capital Assessment Review and Bank Analyzer – Chapter III

Dear,

Last weeks we looked at the Credit Risk module of Bank Analyzer and reviewed some of its competitive advantages for running the Comprehensive Capital Assessment Reviews that FED is running in the US banks, and ECB is running in the European Banks.

http://sapbank.blogspot.com/2014/04/comprehensive-capital-assessment-review.html

http://sapbank.blogspot.com/2014/04/comprehensive-capital-assessment-review_20.html

Amongst them, the main one is the holistic vision of Risk and Accounting that the Integrated Financial and Risk Architecture offers.

Today, we’re finalizing this collection of posts about the Comprehensive Capital Assessment Reviews, by looking at the final objective of the Capital Reviews.

Capital Reviews must measure the Capital Coverage of the bank, verifying if the Bank has a capital buffer, big enough for supporting stressed scenarios, like those suffered by the Financial System during the worst days of the 2008 financial crisis.

In case the analyzed bank has enough capital, there’re no more actions to be taken; but in case the bank is suffering a capital shortage, the regulatory authorities will take immediate actions for assuring the regulatory capital levels are recovered.

These recapitalization actions have an impact in the Banks reputation and reduce the stock value of the shareholders.

http://www.investmentexecutive.com/-/five-banks-fail-fed-stress-tests-         

As the systemic crisis evolves, capital requirements will become higher, making it more expensive; consequently shareholders will request higher returns on their investments.

On the other hand stocks value depend on the banks’ profits, and require the bank investing, and assuming risks, that will increase the bank’s Risk Weighted Assets and consumed Capital.

This is a difficult equation, executives have to optimize the return on bank´s investments, minimizing, at the same time, the capital consumed.

There’re many techniques and actions for Capital Optimization; a particularly relevant one is the optimal distribution of collaterals.

Basel agreements, including Basel III, recognize the importance of collateralization as risk mitigation technique for reducing the Capital requirements of the Bank. 

In the simplistic case, collateralization is built in a one-to-one relationship to the risk exposure, but in many cases, the relationship is established between several risk exposures and a collateral pool (containing several individual collateral assets).

In the second case, there’s an optimal distribution of the collaterals to the risk exposures, limiting individual over-collateralizations and assuring the reduction of the total capital requirements of the collateralized exposures.

The risk of the collateralized exposures and value of the collaterals change dynamically, as the probabilities of default, ratings and hair-cuts are dynamic magnitudes, dependent on the economic conditions of the business segments; consequently the optimal distribution of collaterals also changes dynamically.

Bank Analyzer Credit Risk supports (in the Level 2 of the Credit Risk calculation) the dynamic calculation of the optimal distribution of a collateral pool to the individual collateralized exposures, reducing the capital requirements (capital consumed).

This optimal distribution of collateral rights is the foundation of the Dynamic Collateral Management; a new discipline with a growing recognition in the last years.

We’ll talk about it in more detail in a future post.

Looking forward to read your opinions.

K. Regards,

Ferran.