Dear,
For decades, Global Debt has grown till rising historically high levels. At the same time, overconsumption of natural resources reduced the future potential growth.
Debt consumes Capital and Limited Economic Growth reduces Capital generation; if the system consumes more Capital than what it generates, makes Capital scarce.
As Capital is the most important resource of the economic system and it has become scarce, there is no higher priority than Capital Optimization.
Just two links where you can check what I just said.
https://www.economist.com/content/global_debt_clock
https://www.imf.org/external/pubs/ft/fandd/2020/03/larry-summers-on-secular-stagnation.htm
Actually, Capital Optimization has been a concern for years, most people understand that we can not grow unlimitedly in a world of limited resources (and Solvency/Capital is also a resource).
In the 2008 Financial Crisis, it became clear that Solvency is limited, and some recognized advisors gave a warning that Capital Optimization had become a critical activity.
A very good example is McKinsey’s paper of 2012 "Capital management: Banking's new imperative"
https://www.mckinsey.com/business-functions/risk/our-insights/capital-management-bankings-new-imperative
But there are many others;
https://www.oliverwyman.com/content/dam/oliver-wyman/v2/publications/2013/jun/Oliver_Wyman_RWA_Commercial_and_Retail_Banking.pdf
https://www.oliverwyman.com/content/dam/oliver-wyman/global/en/2015/jan/Efficient%20Regulatory%20Capital%20Management.pdf
Unfortunately, most of these documents give general advice, but in my opinion, failed on describing a concrete proposal for Capital Optimization.
I have been an SAP Consultant for nearly 30 years, first in the "real economy" (Chemical, Retail, Manufacturing, Telco, etc.) and since 2006 in Analytical Banking.
Capital Optimization has always been at the core value proposition of SAP; reducing Production, Storage and Transportation costs by collaborating and integrating processes. For instance; SAP Vendor Managed Inventory scenarios are clear examples of Capital Optimization.
For me, it was clear that the answer to Solvency and Liquidity Optimization requirements of the Financial System had to be driven by SAP, and in 2009 I finished the theoretical analysis of what should be a Capital Optimization model for Solvency and Liquidity.
You can find a short and simplified description in this video.
https://www.youtube.com/watch?v=GkcVF5CWVrU
Physics Principles teach us that Capital Optimization is determined by the capacity of reducing the entropy of a system, like a production process, a combustion engine, or a lithium battery.
Same principle applies to Solvency and Liquidity; Optimizing Financial Capital, for instance reducing Risk Weighted Assets, requires reducing the uncertainty (entropy) of the system with information. The question is, where and how to collect the necessary information?
With my experience as SAP Consultant in the "real economy" I knew that SAP is the world’s biggest collector of corporate information. As I mentioned before, companies share the information stored in their SAP systems for reducing Production and Transportation costs, improving customer service levels, etc. All these are examples of Capital optimization.
Same principle applies to Solvency and Liquidity, only by sharing information between Financial Services and Real Economy we can optimize Solvency and Liquidity; and if SAP is the biggest collector of corporate information (approx. 70% of the world’s GDP), the answer is clear.
Every process in the real economy, from a sales order to a production operation consumes and generates capital and liquidity (inflows and outflows of the process), the more efficient the process is, the higher the outflows are, minimizing the inflows. But the process requires a business process maturation, and this time-mismatch is covered by the Financial System.
If you model the capital and liquidity consumption of all the inflows and outflows (financial and non-financial) involved in a business process, you have the key for opening the capital optimization gate.
For the last 8 years a group of partners have worked on this, modelling the business events on the real economy for calculating how they consume and generate capital and liquidity, for answering the question of the solvency and liquidity that must be incorporated to the business processes for optimizing the capital of the system.
The final outcome is an SAP Banking system which speaks with the SAP systems of the corporations managed with SAP systems, and offers them Financial Services, optimizing the Capital and Liquidity of the System.
In a few words, we have translated the principles of the Vendor Managed Inventory scenarios to Financial Services, so instead of optimizing Inventory Levels or Production Capacity, we optimize Solvency and Liquidity.
We have run several prototypes and demos, and we feel ready to offer the service and we are looking for partners willing to be part of this endeavor.
If any of you is interested, you can send me an email to ferran.frances@capitency.com
Kind 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
