Capital Optimization with SAP Financial Products Subledger.

Dear all,

The Financial System is under a big stress, coming from two forces.

1) Excess of Debt ($250 Trillion). Debt consumes Capital and historically high levels of Debt reduce the Bank’s Capital available for Investing and Lending.

https://www.bloomberg.com/graphics/2019-decade-of-debt/

2) Limited Economic Growth. Capital is generated by economic growth and slow economic growth means weak Capital generation.

As we are in an economic environment of Limited Capital Generation and persistent Capital Consumption, Capital has become scarce; and don’t forget that Capital is the most important Resource of the Financial System.

Since 2008 Crisis, Bailouts and Quantitative Easing Cycles have produced the illusion that Capital was available, delaying the effects of the Capital scarcity and the necessary transformation of the Financial System.

https://www.reuters.com/article/us-eurozone-ecb-qe/the-life-and-times-of-ecb-quantitative-easing-2015-18-idUSKBN1OB1SM

I have been an SAP Analytical Banking consultant since 2006 and after 2008 Financial Crisis I thought that the time of the Financial System transformation have arrived; I was wrong.

For a decade, ultra aggressive monetary policies have delayed the problem, pushing down the yields and inflating artificially the value of the assets.

Again, this has delayed the problem of the Capital scarcity but it has not solved anything.

This week IMF urged German banking sector to accelerate restructuring.

https://www.reuters.com/article/us-germany-economy-imf/imf-urges-german-banking-sector-to-accelerate-restructuring-idUSKCN1SN14X

Reducing the Operational Costs by restructuring banks is just the first step of a much deeper transformation; the Financial System must change from a model based in Volume to a model based in Efficient Management of Capital, and this is a much more complicated challenge.

Setting Efficient Management of Capital as the main Priority requires redesigning the Bank’s Information Systems Architecture, 3 objectives need to be fulfilled.

1) Planning the bank Sales (Lending & Investment), maximizing the Profit weighted by Capital consumption.

2) Applying timely and efficiently Risk Hedging strategies.

3) Developing a Capital Allocation model which assures that Actual Sales Operations follow Sales Planning.

Planning the bank sales, maximizing the Profit weighted by Capital Consumption requires a centralized and holistic modeling of the bank’s exposures and collaterals, and an integrated calculation of the Portfolio Valuation, Capital Consumption and Provisioning.

You can find a presentation of the concept in the following Youtube link.https://www.youtube.com/watch?v=GkcVF5CWVrU&t=1s

Applying timely and efficiently Risk Hedging strategies requires detailed (Financial Transaction granularity) and fast reporting and simulation capabilities. Something that can only be achieved with the Integrated Financial and Risk Architecture of Bank Analyzer, in combination with the high-performing computing capabilities of SAP HANA.

Finally, developing a Capital Allocation model which assures that Actual Sales Operations follow Sales Planning requires a bidirectional and seamless integration between the Operational and Analytical banking system. SAP Bank Analyzer 9 offers a more simplified interface with SAP Banking Services than previous releases, and as the simplification effort pays back, the required bidirectional communication will be feasible. I will elaborate more in this topic in future articles.

Looking forward to read your opinions.

K. Regards,

Ferran Frances.

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

Collateral Management with SAP S/4HANA for Financial Products Subledger Data Platform.

Dear,
As you probably know, SAP recently released the new SAP S/4HANA for Financial Products Subledger https://www.youtube.com/watch?v=-veOZgkxllQ

There are many advantages on the SAP S/4HANA for Financial Products Subledger and I would need several articles for describing them, but today I will focus on its capacity for the efficient management of the Bank’s collaterals.

One of the main consequences of the 2008 Financial Crisis was the acknowledgement that the Financial System was severely under-capitalized; the issue was tackled with two complementary approaches.

Governments and Central Banks recapitalized the Financial System with Bail-Outs, Troubled Asset Relief Programs and Quantitative Easing Cycles.
Regulators put the focus on increasing and making visible the Capital Requirements with new Solvency and Accounting regulations (IFRS 9, IFRS 15, IFRS 16, IFRS 17, Basel III, Basel IV, etc.)
Recapitalizing the Financial System has been a temporary measure. Global debt has kept growing and weak economic growth has generated new capitalization tensions; more visible as the end of the Quantitative Easing Cycles has been announced in Europe.

With the normalization of the monetary policy Non Performing Assets will become illiquid, pushing down their value and increasing again the capitalization issues.

In this scenario of capital scarcity all forms of capital need to be managed efficiently, and collaterals are probably the form of capital with the poorest representation in the Bank's Information Systems.

Banking Information Systems are General Ledger centered, and as Collaterals are not represented in the Balance Sheet, Bank’s IT Architects have not paid much attention to their modelization.

As any other bank right or obligation, collaterals management has an Operational and an Analytical component.

The Operational management of collaterals focus in the technical details of the collateral and its contractual relationship with the asset, whose risk is hedging,

The Analytical management of collateral focus in the sustainable value of the collateral and its capacity for reducing the capital consumption, and limiting the impairment provision of the asset whose risk is hedging.

In Bank Analyzer and S/4HANA for Financial Products Subledger collaterals are modelled in two different objects.

As a SDL-Financial Transaction for representing the contractual relationship between the collateral and the asset.
As an RDL-entry representing the effective capacity of the collateral for reducing Credit Risk exposures and limiting impairment provisions.
Although a collateral has a Nominal Value, it can have several different Credit Risk mitigation capacities, according to the Solvency calculation approach that the bank is following; Simplified Standardized, Comprehensive Standardized, Foundation IRB and Advanced IRB.

Many times a group of collaterals is covering a group of exposures; determining the most efficient distribution of the collaterals to the exposures reduces the capital consumed which is the foundation of the Dynamic Management of Collaterals, one of the main Capital Optimization techniques.

High performance in-memory computing capabilities of HANA facilitates building simulation scenarios and stress-testing but before banks can take advantage of them, they must improve the representation of the collaterals in their Information Systems.

SAP Bank Analyzer and S/4HANA for Financial Products Subledger provides a centralized repository of collaterals, facilitating regulatory reporting, Risk Weighted Assets and Impairment provisions calculation, stress-testing of the collateral values and simulation scenarios for Capital Optimization.

This is just a brief description of some of the advantages of the Data Model of the Integrated Financial and Risk Architecture of SAP Bank Analyzer and S/4HANA for Financial Products Subledger. We’ll continue in future blogs.

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