Central Data Hubs and the SAP Finance and Risk Data Platform.

Dear,

One of the consequences of the new regulation, emerging from the 2008 Financial Crisis (Basel III, Basel IV, BCBS 239, Dodd-Frank, IFRS 9, etc.) is the pressure for banks Information Systems, on reconciling Analytical and Operational data.

Most Core Banking Information Systems were developed in the 70s-80s, when the computing capacity was much smaller, and regulatory requirements much softer. 

Integration requires processing big data-tables and managing big memory blocks, because every transaction must read and update registers of data from other areas. As computing capabilities were more limited and reconciliation requirements less stringent, Banking Systems were built as separated silos of information with very little integration with each other.

As banking systems grew, this architecture of limited integration produced banking systems with very heterogeneous data, many complex point to point interfaces, and supported by databases whose designs are very distant from the principles of the Referential Integrity.

As mentioned before, the new Financial regulation, particularly BCBS 239 (Principles for effective risk data aggregation and risk reporting), puts the focus on data quality and data reconciliation, and this is increasing the pressure for integrating Financial Data, coming from heterogeneous sources.

https://www.bis.org/publ/bcbs239.pdf

One alternative is implementing an integrated Banking System, with a holistic management of Operational and Analytical Data (like SAP Banking). But the complete replacement of a banking information system is an expensive, challenging process. Performing it in a short-term period is only feasible for small/middle-size banks.

Consequently, many banks are confronting the issue by building a Central Data Hub which receives data from all the operational systems, homogenize the data, and finally stores and delivers it to the other systems of the banking landscape.

I’ve seen several of these initiatives in the last years, and they all present common challenges.

Projects design follow and add-hoc/on-demand approach. Data architects collect data requirements from the data consumer systems, and design the data repository according to these requirements. And then, define the interfaces for collecting data from the source systems and populating the data in the destination systems. 

To some extend, this approach implies reinventing the wheel, according to the bank’s own experience, and limited integration capabilities of the bank’s information architecture.

Additionally, regulation evolves, and new requirements force the data architects to enhance the multiple repository tables and in/out interfaces, compromising the integrity of the initial design. 

SAP has tackled the issue in a completely different way, delivering the Finance and Risk Data Platform, which combines a centralized data-model with an Integrated Financial and Risk Architecture

The Finance and Risk Data Platform has been designed to fulfill present and future Accounting, Risk and Liquidity regulatory requirements, as an alternative to the add-hoc/on-demand approach of the Central Data Hubs.

The Finance and Risk Data Platform combines:

- The accumulated knowledge in the design and development of the Integrated Financial and Risk Architecture of Bank Analyzer during the last 2 decades. The Primary Data Objects of the Bank Analyzer Source Data Layer as an standard template of the Operational Data, and the Result Types of the Results Data Layer as an standard template of Analytical Data.

Data Architects can take advantage of these standard templates as a basic reference, and enhancing them for fulfilling the bank’s specific requirements, without breaking the integrity of the data-model.

- The high-performing capabilities of SAP HANA for storing and managing very-high volumes of data, without intermediate tables and assuring the referential integrity of the database.

- The Extract, Transformation and Loading capabilities of SAP Smart Data Integration in Premise and in the Cloud.

- The Analytical Layers of SAP Bank Analyzer Risk Engines, Liquidity and Risk Management on HANA, Intraday Real-time Liquidity Management, etc.

The main advantage of this approach is the possibility of an incremental implementation, covering first the requirements of a Central Data Hub, interfacing with the current operational and analytical systems of the bank, but capable of growing and fulfilling new regulatory and functional requirements, with the implementation of the multiple analytical layers of the SAP Finance and Risk Data Platform.

Looking forward to read your opinions.

K. Regards,

Ferran.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

Consequences of the Capital scarcity and the new Financial Regulation.

Dear,
Recently, I gave some workshops about IFRS 16 and SAP Flexible Real Estate, and several attendants express their concerns about the cost of the implementation and the available budget.

According to them, although their companies are feeling the pressure for being compliant with the new accounting regulation, it is very difficult to get the budget for regulatory projects which are not business driven.

In my opinion, this represents a limited understanding of the impact of the new regulation in the Financial System and the whole Economy.

As we saw in previous blogs, IFRS is not a temporary fashion. The two arms of the new regulatory framework (Basel Agreements and International Financial Reporting Standards) are the logic consequence of the new economic environment, which its main characteristic is capital scarcity.

The economic environment emerging from the 2008 Financial crisis has two characteristics; limited growth (mainly due to natural resources scarcity) and excess of debt (225% of the GDP)

https://eu.usatoday.com/story/money/economy/2018/04/19/global-debt-tops-164-trillion-imf-warns/530893002/

As a consequence of these two forces; weak growth limiting capital generation, and global debt consuming capital, Capital is becoming very scarce.

And never forget that Capital is the main and most critical resource of the Financial System.

Regulators are very aware of the new economic environment, and push the Financial System towards the new paradigm, “Capital Optimization”.

Basel Agreements (Banking Solvency), IFRS 9 (Financial Instruments Accounting), IFRS 16 (Leasing Accounting), Solvency 2 (Insurance Solvency) and IFRS 17 (Insurance Accounting) have the common objective of making visible the cost of Capital of Financial Assets and Liabilities.

The above list does not represent just a compliance requirement, with limited or no impact to the business. What actually represents is a legal constrain that will drive the way in which companies operate; first Financial Companies, and later the whole economy.

If Capital is scarce and bank’s capital requirements rise, there is less capital available for lending and investing, consequently capital scarcity spreads from the Financial System to the whole economy, and all corporates feel the consequence.

We must understand that this is a Systemic change for the Financial System, from a model based in volume, to a model based in Capital Optimization.

Coming back to the initial point, IFRS 16 requires that Leasing companies make visible the cost of capital of every contract.

And as it happens with any cost, cost of capital reduces the margin and profitability, or forces the company to raise the selling price (making the company less competitive).

It sounds logic then to reduce the cost of capital of the Leasing contract. Let’s see how to do it.

Every Leasing contract represents a collection of three groups of cash-flows.

- Invoices that the lessee will pay in exchange for using the leased asset.
- Value of the leased asset at the beginning and the end of the contract.
- Maintenance costs of the leased asset.

And the value of the contract (leased asset) at the time of the contract activation is determined by discounting the above cash-flows by an interest rate, which combines the funding cost and the contract spread (representing the risk that the contract expected cash flows do not become actual).

Reducing the contract spread, reduces the capital costs and increases the company margin and profitability.

This should be the objective of an IFRS 16 implementation, reducing the capital costs by reducing the risk (spread) associated to the three groups of cash-flows of their Leasing contracts.

We will see detailed examples of the related capital optimization activities in a future blog.

Looking forward to read your opinions.

K. Regards,
Ferran.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com