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