Dear,
The financial system is drowning due to lack of capital. Excess of debt consumes massive amounts of Capital and weak economic growth limits Capital generation.
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 bank 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
Capital is the most critical resource of the Financial System, and if we are in the new environment of capital scarcity, capital optimization becomes the most critical activity.
McKinsey made it very clear in this 2012 paper.
https://www.mckinsey.com/business-functions/risk/our-insights/capital-management-bankings-new-imperative
The final objective of Capital Optimization is maximizing the economic profit weighted by Capital consumption, including all the inflows and outflows of the process. And the first step in a Capital Optimization process is measuring accurately how much Profit or Loss is generated in an economic process and how much Capital is consumed.
This efficiency driven value proposition has been at the center of SAP architecture from the beginning. The first question we can answer in an integrated system is how the company operations drive profit generation. With the first versions of SAP R3 Analytical Accounting (even with R2), executives could answer the question, where and how we make money or suffer losses.
With Profit Center accounting, and even more with the New General Ledger of SAP ECC, we could include assets and liabilities value in the efficiency measurement process. The question was not limited to where and how companies make money or suffer losses, as we could include the assets and liabilities involved in the process, we could determine the Return of the Investment.
But as Capital has become escarce, in addition to determining Profit and invested assets, we also must estimate the potential losses due to risk exposure (Expected Loss, Value at Risk, etc.), which at the end is another word for calling Capital consumption.
But calculating the losses due to risk exposure requires measuring the exposure and its ponderation of risk, and here is when SAP becomes the absolute leader in providing answers to our questions.
Capital consumption flows from companies to their counterparties and they have to be tracked for optimizing Capital.
If we look at a Loan, we can simplistly think that the exposure is the disbursed amount; this is how it is modelled in many legacy banking systems. But actually the committed and not disbursed amount (free line) is also part of the exposure.
The not disbursed commitments are also called off-balance exposures, which means that they are not represented in traditional “on-balance” Financial Statements. This is another limitation for legacy banking systems which have the Financial Statements at the center of their regulatory reporting architecture.
In the real economy there are many commitments, bilateral firmed commitments like a Contract, unilateral firmed commitments like an Offer (an Option that the other counterparty will accept or not) or less formalized like a Quotation.
When a Financial Instrument provides Capital and Liquidity to a company, all the risk exposures of the company and their risk ponderations determine the company solvency, and consequently the Capital consumption of the company counterparty (bank or not).
During the last 30 years, SAP has become the absolute leader in measuring and tracking exposures and risk in big and medium size corporations, which is the basis of Capital consumption in the real economy.
As the Financial System has to be transformed from a model based in volume to a model based in Capital Optimization, it requires to track the flows of Capital consumption. All these capital consumption flows are already in SAP systems, speaking SAP language. The only alternative is that the financial system “speaks” the same language in order of tracking the capital consumption flows. This is what SAP professionals call “Integration”.
The last 11 years our team has worked in modelling all the economic events and business 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
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