Dear,
Capital is the most critical resource of the Financial System. In the last decades, due to excess debt and weak economic growth, Capital has become very scarce.
According to the European Banking Authority, European banks face a 135 billion euro capital shortfall.
https://www.reuters.com/article/eu-banks-regulator/eu-watchdog-says-banks-face-135-billion-euro-capital-shortfall-idINL8N2433U3
While other sources warn that the capital shortfall of the European banks could be 600 billion euro.
https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/eurozone-banks-may-face-8364-600b-capital-shortfall-in-systemic-crisis-8211-economists-59238561
If Capital is scarce, the most critical activity of the Financial System is Capital Optimization and this is driving the transformation of the Financial System, from a model based in Volume to a model based in Efficient Capital Management.
One of the most effective techniques in Capital Optimization is Dynamic Management of Collaterals, let me give you a brief description of the concept.
A classical method for Risk Mitigation (Capital consumption reduction), recognized by all the Basel agreements and solvency regulations, is collateralization. Consequently, collateral rights are part of the Capital of an organization.
On collateral management we can follow two basic approaches.
• Static Collateral Management. The Bank has an exposure (receivable or asset) and requires a collateral right for hedging the Default Risk of the exposure. Normally, the higher the exposure, the higher the collateral that the Bank will require. The collateralization degree will be determined by the difference between the amount of the Exposure and the value of the collateral.
• Dynamic Collateral Management. On the other hand, according to the Basel agreement, Capital consumption (solvency) does not depend directly on the Bank’s exposure, but on the Bank’s exposures “weighted” but the exposures’ risk. Consequently collateralization degree depends on the risk of the exposure, and it changes (dynamically) with it.
The difference on the above approaches has relevant consequences for Capital Management.
In the first case, collateralization does not depend on the exposure’s risk (rating), but only on its size (the risk of the collateral value is somehow considered if we update the collateral value regularly), while in the second approach the risk of the exposure is integrated on the Risk Weighted Assets Calculation and consequently on the collateralization degree.
The second approach is more sensitive to risk and permits a more efficient management of the Collateral, and consequently, the Solvency and Capital.
This is particularly useful when 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.
The last 11 years our team has worked in modelling all the rights, obligations, assets, liabilities, economic events and value flows represented in the SAP systems of the Real Economy, in terms of Capital and Liquidity consumption and generation. With this information, our systems measure how to offer Financial Instruments for covering Capital and Liquidity gaps or investing Capital and Liquidity surpluses, optimizing the Capital and Liquidity consumption of the system.
We are working on presenting our system to the market, and looking for business partners and investors, if you are interested do not hesitate in contacting me at ferran.frances@capitency.com
Looking forward to reading your opinions.
Kindest 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
No comments:
Post a Comment