Dear,
Recently, I’ve been preparing the training program for a Blockchain course which, as you know, is a “popular topic” in the Finance and Technology discussions these days.
I’ve discussed and requested feed-back to friends and colleagues, some of them followers of this blog, to the proposed training program.
In general, they agree that the main issue on Blockchain and Fintech training programs, books and events is the lack of focus on Blockchain applications. The value of a new technology is always determined by its capacity to provide value, which respond to the main challenges of its potential users.
In my opinion, any book, blog or training program oriented to a technology, applicable to the Financial System, should provide an answer to the main challenges of the Financial System.
And what are those challenges?
In a few words, the world's Financial System is over-leveraged, with limited Return of the Assets, and rising regulatory Capital Requirements.
Consequently, the main challenge is Capital Scarcity.
If the main Challenge is Capital Scarcity, the priority must be Capital Optimization, and this is not rocket science, it’s just common sense.
Since Dr. Eliyahu M. Goldratt introduced the Theory of Constrains in the 80s, we have a management philosophy, for analyzing and optimizing business processes, in scenarios of scarcity of the critical resources (bottlenecks).
Capital Consumption depends on the Risk. The Capital consumed in a Business Process depends, directly, on the risk that the expected Value-Flows don’t become actual, mainly due to three reasons:
1) The probability that the counter-party, in the business process, don’t fulfill his obligations (credit risk).
2) The volatility of the environment, which makes fluctuate the value flows of the business process (market risk)
3) The probability that we make mistakes or suffer fraud (the process is not run efficiently), which generate losses (operational risk).
Naturally, a Capital Optimization program must start by identifying the business process, in which the risk of suffering big losses is higher, and focus in reducing the uncertainty of the expected value-flows (planning vs actual value-flows), due to any of the above risk types.
This is one of the biggest advantages of the Blockchain, increasing transparency and auditability of the value-flows; that’s what makes it particularly useful in Capital Optimization.
A good example of Capital Optimization, by using Blockchain, is the Leveraged Buyout Process, which consists in the acquisition of a company, with Capital lent by an investment bank. The investment bank requests, as a collateral of the Loan, shares, assets and rights, of the acquired company.
This process facilitates mergers and acquisitions; limiting the Capital that the acquiring company has to commit.
In this process, the Fair Value of the Loan depends, directly, on the performance of the acquired company.
If the acquired company does not perform well, the borrower will have difficulties for fulfilling his obligations, and incentives to declare bankruptcy. At the same time, the bad performance of the acquired company represents a worthless guarantee, and a waste of Capital for the investment bank.
Blockchain offer us the technology for integrating accurately the Financial Statements of the acquired company, in an auditable ledger, with the necessary data for determining the Fair Value of the Investment Bank Asset.
But, in management, Information is useless without Analytical tools, for supporting the decision-making processes; this is the value provided by Bank Analyzer in the construction.
Bank Analyzer is not just a regulatory reporting tool, or an accounting system. Bank Analyzer is a Capital Optimizer that can tell us how much capital we’re consuming, by business segment, portfolio, individual business, region, client, etc, and what is the expected return of the consumed capital.
This is the basis for prioritizing the best market opportunities and taking timely corrective actions, in case of mistakes, building the foundation for a Capital Efficient management.
Remember that we’re in a systemic crisis, driven by Capital Scarcity; technology investments also consume Capital, and we have to prioritize those technologies which represent a more efficient use of it.
Join the SAP Banking Group at: http://www.linkedin.com/e/gis/92860
Visit my SAP Banking Blog at: http://sapbank.blogspot.com/
Let's connect on Twitter: @FerranFrancesGi
K. Regards,
Ferran.
Recently, I’ve been preparing the training program for a Blockchain course which, as you know, is a “popular topic” in the Finance and Technology discussions these days.
I’ve discussed and requested feed-back to friends and colleagues, some of them followers of this blog, to the proposed training program.
In general, they agree that the main issue on Blockchain and Fintech training programs, books and events is the lack of focus on Blockchain applications. The value of a new technology is always determined by its capacity to provide value, which respond to the main challenges of its potential users.
In my opinion, any book, blog or training program oriented to a technology, applicable to the Financial System, should provide an answer to the main challenges of the Financial System.
And what are those challenges?
In a few words, the world's Financial System is over-leveraged, with limited Return of the Assets, and rising regulatory Capital Requirements.
Consequently, the main challenge is Capital Scarcity.
If the main Challenge is Capital Scarcity, the priority must be Capital Optimization, and this is not rocket science, it’s just common sense.
Since Dr. Eliyahu M. Goldratt introduced the Theory of Constrains in the 80s, we have a management philosophy, for analyzing and optimizing business processes, in scenarios of scarcity of the critical resources (bottlenecks).
Capital Consumption depends on the Risk. The Capital consumed in a Business Process depends, directly, on the risk that the expected Value-Flows don’t become actual, mainly due to three reasons:
1) The probability that the counter-party, in the business process, don’t fulfill his obligations (credit risk).
2) The volatility of the environment, which makes fluctuate the value flows of the business process (market risk)
3) The probability that we make mistakes or suffer fraud (the process is not run efficiently), which generate losses (operational risk).
Naturally, a Capital Optimization program must start by identifying the business process, in which the risk of suffering big losses is higher, and focus in reducing the uncertainty of the expected value-flows (planning vs actual value-flows), due to any of the above risk types.
This is one of the biggest advantages of the Blockchain, increasing transparency and auditability of the value-flows; that’s what makes it particularly useful in Capital Optimization.
A good example of Capital Optimization, by using Blockchain, is the Leveraged Buyout Process, which consists in the acquisition of a company, with Capital lent by an investment bank. The investment bank requests, as a collateral of the Loan, shares, assets and rights, of the acquired company.
This process facilitates mergers and acquisitions; limiting the Capital that the acquiring company has to commit.
In this process, the Fair Value of the Loan depends, directly, on the performance of the acquired company.
If the acquired company does not perform well, the borrower will have difficulties for fulfilling his obligations, and incentives to declare bankruptcy. At the same time, the bad performance of the acquired company represents a worthless guarantee, and a waste of Capital for the investment bank.
Blockchain offer us the technology for integrating accurately the Financial Statements of the acquired company, in an auditable ledger, with the necessary data for determining the Fair Value of the Investment Bank Asset.
But, in management, Information is useless without Analytical tools, for supporting the decision-making processes; this is the value provided by Bank Analyzer in the construction.
Bank Analyzer is not just a regulatory reporting tool, or an accounting system. Bank Analyzer is a Capital Optimizer that can tell us how much capital we’re consuming, by business segment, portfolio, individual business, region, client, etc, and what is the expected return of the consumed capital.
This is the basis for prioritizing the best market opportunities and taking timely corrective actions, in case of mistakes, building the foundation for a Capital Efficient management.
Remember that we’re in a systemic crisis, driven by Capital Scarcity; technology investments also consume Capital, and we have to prioritize those technologies which represent a more efficient use of it.
Join the SAP Banking Group at: http://www.linkedin.com/e/gis/92860
Visit my SAP Banking Blog at: http://sapbank.blogspot.com/
Let's connect on Twitter: @FerranFrancesGi
K. Regards,
Ferran.
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