Dear,
In my opinion, the Blockchain is the most important innovation of the Finance Technology in the last years.
The Blockchain represents to the Internet of Value, what the TCP IP Protocol represented for the Internet of Information 25 years ago.
In the same way that it was difficult to imagine Facebook, Amazon, Skype or Netflix 25 years ago, it's difficult to imagine the services that Blockchain will support in the future.
Today, we know that some services are about to be implemented in the Blockchain, some of the most important ones are:
International Payments.
http://www.ibtimes.co.uk/
Securities Trading.
http://www.wired.com/2015/12/
Both are major achievements in terms of efficiency and transparency, but today I'm going to focus on some implications of the second one.
As we discussed in previous blogs, we're in the middle of a systemic crisis whose main characteristic is Capital Scarcity, as a consequence Capital Optimization will be the priority of the Financial System that will emerge of this crisis.
Capital has many shapes, and one of the most important is collateral, consequently Efficient Management of Collaterals is a critical activity in Capital Optimization.
Securities are one of the most usual forms of collateral, they're liquid assets traded in an organized market which provides them an updated price.
Blockchain provides a revolutionary technology for the efficient trading of securities, as securities trading and ownership are moved to a public, efficient and structured database like the Blockchain, the opportunities of improving the use of these securities in collateral agreements also increase.
Efficient use collateral rights require reduce the Loss Given Default of the exposures by implementing risk mitigation techniques, but avoiding over-collateralization which freezes capital without generating any return.
But balancing collaterals and exposures in order or improving the Risk Adjusted Return on Capital (RAROC) is not an easy task. The Loss Given Default depends on the rating of the counterpart (or his Probability of Default), and the value of the collateral fluctuates every second. Consequently the assignment of Collateral portions of a Collateral Pool to the bank's exposures should be a dynamic activity, that must be adjusted as the market and counterparty situations change.
For instance, as the rating of the counterparty improves, or the collateral value increases, the LGD will be reduced till it achieves a limit (full collateralization) in which better rating or more col lateralization are not improving the Risk Weighted Assets. This collateral excess could be used as a guarantee in another transaction, like a Repurchase Agreement, which will improve the portfolio return, without compromising capital consumption.
On the other hand, if collateral value declines or counterparty rating gets worse, higher portions of the collateral pool will be required for reducing capital consumption.
But the above theory presents practical constrains; in order of facilitating the optimal distribution of collaterals we need some requirements to be covered.
- Accurate calculation of the collateralization levels of the bank's exposures.
- Efficient (including inexpensive transactions) trade of collateral rights.
SAP Bank Analyzer is the answer to the first request, Blockchain is the answer to the second.
With Bank Analyzer we can guarantee an accurate measure of the capital consumed by the bank's portfolio, individually or by portfolios.
Additionally, we can implement alerts in the Analytical Layer of Bank Analyzer Credit Risk Module, informing the Bank's Capital Manager of the exception situations (under or over capitalization) which will trigger his attention in order of taking corrective actions.
But we also need that the transaction costs (including fees, transaction speed and settlement risk) are reduced, because if not, the potential profits of managing dynamically the bank's collateral will be reduced by the transaction costs.
This is exactly what blockchain is offering us, efficient, inexpensive and transparent trading of securities rights.
But securitization and efficient management of collaterals also presents other challenges, we'll talk about them in future blogs.
Join the SAP Banking community at: http://www.linkedin.com/e/gis/92860
Looking forward to read your opinions.
May the Force be with you.
Ferran.
In my opinion, the Blockchain is the most important innovation of the Finance Technology in the last years.
The Blockchain represents to the Internet of Value, what the TCP IP Protocol represented for the Internet of Information 25 years ago.
In the same way that it was difficult to imagine Facebook, Amazon, Skype or Netflix 25 years ago, it's difficult to imagine the services that Blockchain will support in the future.
Today, we know that some services are about to be implemented in the Blockchain, some of the most important ones are:
International Payments.
http://www.ibtimes.co.uk/
Securities Trading.
http://www.wired.com/2015/12/
Both are major achievements in terms of efficiency and transparency, but today I'm going to focus on some implications of the second one.
As we discussed in previous blogs, we're in the middle of a systemic crisis whose main characteristic is Capital Scarcity, as a consequence Capital Optimization will be the priority of the Financial System that will emerge of this crisis.
Capital has many shapes, and one of the most important is collateral, consequently Efficient Management of Collaterals is a critical activity in Capital Optimization.
Securities are one of the most usual forms of collateral, they're liquid assets traded in an organized market which provides them an updated price.
Blockchain provides a revolutionary technology for the efficient trading of securities, as securities trading and ownership are moved to a public, efficient and structured database like the Blockchain, the opportunities of improving the use of these securities in collateral agreements also increase.
Efficient use collateral rights require reduce the Loss Given Default of the exposures by implementing risk mitigation techniques, but avoiding over-collateralization which freezes capital without generating any return.
But balancing collaterals and exposures in order or improving the Risk Adjusted Return on Capital (RAROC) is not an easy task. The Loss Given Default depends on the rating of the counterpart (or his Probability of Default), and the value of the collateral fluctuates every second. Consequently the assignment of Collateral portions of a Collateral Pool to the bank's exposures should be a dynamic activity, that must be adjusted as the market and counterparty situations change.
For instance, as the rating of the counterparty improves, or the collateral value increases, the LGD will be reduced till it achieves a limit (full collateralization) in which better rating or more col lateralization are not improving the Risk Weighted Assets. This collateral excess could be used as a guarantee in another transaction, like a Repurchase Agreement, which will improve the portfolio return, without compromising capital consumption.
On the other hand, if collateral value declines or counterparty rating gets worse, higher portions of the collateral pool will be required for reducing capital consumption.
But the above theory presents practical constrains; in order of facilitating the optimal distribution of collaterals we need some requirements to be covered.
- Accurate calculation of the collateralization levels of the bank's exposures.
- Efficient (including inexpensive transactions) trade of collateral rights.
SAP Bank Analyzer is the answer to the first request, Blockchain is the answer to the second.
With Bank Analyzer we can guarantee an accurate measure of the capital consumed by the bank's portfolio, individually or by portfolios.
Additionally, we can implement alerts in the Analytical Layer of Bank Analyzer Credit Risk Module, informing the Bank's Capital Manager of the exception situations (under or over capitalization) which will trigger his attention in order of taking corrective actions.
But we also need that the transaction costs (including fees, transaction speed and settlement risk) are reduced, because if not, the potential profits of managing dynamically the bank's collateral will be reduced by the transaction costs.
This is exactly what blockchain is offering us, efficient, inexpensive and transparent trading of securities rights.
But securitization and efficient management of collaterals also presents other challenges, we'll talk about them in future blogs.
Join the SAP Banking community at: http://www.linkedin.com/e/gis/92860
Looking forward to read your opinions.
May the Force be with you.
Ferran.
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