Dear,
The Financial System is in process of Systemic Change from a model based in Volume to a model based in Efficient Management of Capital.
Excess of Debt (consumes Capital) and weak economic growth (limits Capital generation) has generated an economic environment of Capital scarcity. Do not forget that Capital is the most important resource of the Financial System.
Many strategic thinkers have detected the threat and the systemic change, but most of them have failed in proposing solutions.
In 2012 McKinsey released the paper “Capital Management. Banking’s new imperative” whose title is self-explanatory.
https://www.mckinsey.com/~/
Since them many others have made analog warnings and issued similar papers. Just google “Banking Capital Optimization” (without quotes) and you will find many comments, articles and papers about this topic.
While global debt keeps growing and natural resources scarcity puts a brake on economic growth, Capital scarcity becomes bigger and bigger making it more urgent to find solutions.
In July 2019 the European Banking Authority estimated the Capital shortage of the european banking system at 135 billion euro. This estimation does not include the economic impact of the COVID-19 pandemic.
https://www.reuters.com/
German economists Moritz Schularick, Sascha Steffen and Tobias Tröger warned that the Capital shortage of the European Banking System could achieve 600 billion euro due to the economic consequences of the COVID-19 pandemic.
https://papers.ssrn.com/sol3/
Additionally we should include the impact on the economic growth and Capital of the costs of the energy transition process that the world’s economies are confronting in the oncoming months and for a very long period of time.
Larry Summers, 71st Secretary of the Treasury for President Clinton and the Director of the National Economic Council for President Obama, described the current economic environment as "Secular Stagnation; a prolonged period in which satisfactory growth can only be achieved by unsustainable financial conditions”
http://larrysummers.com/2017/06/07/secular-stagnation/
Capital scarcity is not a hypothesis, it is a fact. Its effects are already visible but they are going to be much more visible very soon.
If Capital is and it is going to be scarce, Capital Optimization is mandatory, and the question is do we have feasible proposals for Capital Optimization?
The first pillar in a Capital Optimization design requires measuring where, when and how Capital is consumed, and tracking the Capital flows amongst organizations, partners, counterparties, etc.
This is known, and there are and there have been initiatives for improving the tracking of Capital flows; Specialized Lending is an example.
Specialized Lending is a method of funding in which the lender looks primarily at the revenues generated by one or many clearly identified assets, both as the sources of repayment and as collaterals for the loan. Specialized Lending uses Special Purpose Vehicles which are legal entities owning the assets; isolating the assets and their generated revenues from other counterparties or exposures.
As you can see, capital flows are encapsulated to the business activities of the Special Purpose Vehicle, and then tracked and accurately evaluated.
The difficulty is this is not a flexible construction and the involved operational costs are quite high.
On the other hand, SAP has been modelling and tracking accurately capital flows of the real economy for 30 years. SAP integration capabilities facilitate evaluating individually the business flows, estimating their fulfillment and generating the accounting entries accordingly.
By estimating the risk involved in the exposures of these capital flows, we would have a very accurate measurement of the Capital consumption of them (capital consumption is directly proportional to the risk weighted exposures).
This is what we have done during the last 12 years; we have analyzed the capital flows of the real economy, modelled in SAP systems, and built a systematic model for estimating the risk weighted exposures of these business flows, tracking them individually as they are transferred amongst counterparties.
With this information, we can measure the expected profit of a business process, weighted by its Capital consumption, which is the first pillar of a Capital Optimization system.
Looking forward to reading your opinions.
Kindest Regards,
Ferran Frances.
www.capitency.com
Join the SAP Banking Group at: https://www.linkedin.com/
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Let's connect on Twitter: @FerranFrancesGi
Ferran.frances@capitency.com
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