Stress Testing, TLAC, MREL and Capital Optimization with SAP Bank Analyzer.

Dear,
Friday this week the European Banking Authority will release the results of its latest stress test.

http://www.eba.europa.eu/risk-analysis-and-data/eu-wide-stress-testing/2016

Capital requirements and capital levels have been the main topic in Banking supervision since the 2008  financial crisis.

In the same line, two words are going to become very popular in the next months, TLAC and MREL. TLAC stands for Total Loss Absorbing Capacity and MREL stands for Minimum Requirement for Own Funds and Elegible Liabilities.

The Total Loss Absorbing Capacity determines the capital requirements for systemic banks and financial groups, that must be available to absorb potential losses.

The Minimum Requirement for Own Funds and Elegible Liabilities will determine the capital requirements for non systemic banks.

Implementing these standards is going to have serious consequences. During this year, European banks have suffered heavy losses in the stock market as a consequence of high levels of delinquency, low profitability of the banking business, and the regulatory changes increasing the banks capital requirements.

Additionally, shareholders losses penalize the markets feeling on the banking sector, increasing the cost of capital of the industry, opening the gate for more losses.

Bringing clarity to the regulatory framework is the key to exiting this vicious cycle; hopefully, in the oncoming months, the regulator will define.

1) The standard and internal approaches to measure the Credit and Operational Risk.

2) Methods to determine the Leverage Ratio for systemic and non-systemic banks.

3) Final definition of the Total Loss Absorbing Capacity requirements and Minimum Requirement for Own Funds and Elegible Liabilities, for systemic and non-systemic banks.

The question is; what can be the impact of the final definition of the regulatory framework?
Let's see some estimations.

Two weeks ago, David Folkerts-Landau, chief economist of the Deutsche Bank, estimated that 150.000 million euros are needed for recapitalizing the European banking system.

http://www.bloomberg.com/news/articles/2016-07-10/eu-banks-need-166-billion-deutsche-bank-economist-tells-welt

According to Bloomberg, the European Banking Authority estimates that 470.000 million euros are needed for fulfilling the capital requirements determined by the TLAC and MREL standards.

http://www.bloomberg.com/news/articles/2016-07-20/european-banks-may-need-517-billion-of-loss-absorbing-capital

It's clear that Capital is going to be scarce and expensive, consequently Capital Optimization is going to be at the center of the banks strategic plans.

Capital Optimization starts by measuring how, where and when capital is consumed. Questions that can be answered by SAP Bank Analyzer.

Bank Analyzer comes with a data-model (Financial Database), and a calculation layer (Risk Engines of the Process and Methods Layer), which provide detailed measurement of the capital consumed by any analytical dimension.

The Financial Position Objects of the Results Data Layer represent the fundamental constituent of the capital and accounting value of the banks financial instruments.

Additionally, the Financial Position Objects can be stressed in simulated scenarios that will provide a holistic vision of the bank's portfolio value, and the capital consumed for generating this value.

And this is just the beginning; combining the computing capabilities of SAP HANA with known algorithms of discrete mathematics, like the Simplex method, we can build future Risk Engines for Capital Optimization.

This is the value proposition of Bank Analyzer, the best answer for the biggest concern of the banks' executives.

In my opinion, this value proposition should be highlighted, maybe calling it Capital Optimizer instead of Bank Analyzer, but this is a different story.

Join my SAP Banking Group at: http://www.linkedin.com/e/gis/92860

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

Why SAP Bank Analyzer is not an Accounting System?

Dear,
Recently I spoke with the Country Manager of an SAP Partner who has detected several opportunities for implementing Bank Analyzer - AFI in his region.

He mentioned his concerns about the challenges of implementing Bank Analyzer, compared to other competitors.

"It's hard to sell an IFRS Accounting System more expensive to implement, even if it comes from the leader on developing Integrated Information Systems".

But comparing Bank Analyzer with an IFRS Accounting system is a mistake, because Bank Analyzer is not just an accounting system.

Bank Analyzer is a Capital Optimizer, which also fulfills the IFRS reporting requirements of a Financial Institution.

Today, the executives of most of the Banks and Insurance companies of the world are concerned with being IFRS compliant in the next months, because they're very aware of the consequences if they are not.

But this is just the beginning, at the same time the credit risk managers are concerned about the Basel III reporting requirements and the justifications of their IRB Risk models.

The Bank's information architects are trying to determine the full implications of the BCBS 239 directive. And very soon, they will discover that IFRS 15 also applies for Banks and it comes with very deep implications for the Bank Information Systems Architecture.

And for making it worse, bank's executives are concerned  with the rising Capital Requirements, including the Total Loss Absorbing Capacity regulation, and the difficulties of generating value for their shareholders in a difficult environment of margins reduction.

It seems that the regulator has decided to make the bankers’ lives difficult, just when they face the worse economic environment with negative interest rates and limited growth.

This is not personal. Regulators know that we're in the middle of a Systemic Crisis that will transform the Financial System, from a model based in volume, to a model based in Efficient Management of Capital.

That's why they are driving bankers towards the new paradigm, saturating them with new and harder regulations.

IFRS 9, Basel III, IFRS 15, BCBS 239, TLAC are not isolated pieces of regulation, they're a complete framework designed to put Capital Efficiency at the centre of the banks' strategic objectives.

Additionally, auditors look at the figures, with the obligation of reconciling the information provided by all the reporting requirements.

The response to this challenge requires a holistic modelisation of the Bank's Capital and Liquidity. This is the Integrated Financial and Risk Architecture of SAP Bank Analyzer.

In one sentence; the Bank Analyzer IFRA provides an accurate mesurement of the Capital and Liquidity, generated and consumed, by any potential combination of analytical dimensions, including the business processes involved.

For instance, IFRS 9 requires to report in "accounting terms", the Capital generated and consumed by business segment, including Fair Value and Impairment Calculations.

Basel III and Total Loss Absorbing Capacity regulations require banks to report the Capital consumed by business segment, and BCBS 239 defines the Data Governance for proving the accuracy of the Capital and Liquidity calculations.

Bank Analyzer Primary Objects and Financial Position Objects are the bricks of the holistic data model, and the Bank Analyzer Risk Engines provide the necessary calculation logic to fulfill the above and future reporting requirements.

This is the answer I always give to clients who ask me why they must implement Bank Analyzer.

Join my SAP Banking Group at: http://www.linkedin.com/e/gis/92860

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