Dear,
We are in a process of systemic transformation of the Financial System, from a model based on Volume to a model based on Capital Optimization.
The Integrated Financial and Risk Architecture of SAP Banking offers multiple functionalities to support a holistic Capital Optimization process, but today we will look at its capacity for the efficient management of bank's collateral management.
One of the main consequences of the 2008 Financial Crisis was the recognition that the Financial System was severely undercapitalized; the subject was approached with two complementary approaches.
Governments and central banks recapitalized the financial system with bailouts, distressed asset relief programs, and cycles of quantitative easing.
The regulators focus on increasing and making visible the Capital Requirements with new Solvency and Accounting standards (IFRS 9, IFRS 15, IFRS 16, IFRS 17, Basel III, Basel IV, etc.)
The recapitalization of the Financial System has been a temporary measure. The global debt has continued to grow and the weak economic growth has generated new capitalization tensions; more visible as the end of quantitative easing cycles in Europe is announced.
With the advent of Quantitative Tightening, non-performing assets will become illiquid, reducing their value and once again increasing capitalization problems.
In this scenario of scarcity of capital, all forms of capital must be managed efficiently, and guarantees are probably the form of capital with the least representation in the Bank's Information Systems.
Bank information systems are ledger-centric, and since collateral is not represented on the balance sheet, the bank's IT architects have not paid much attention to modeling it.
Like any other right or obligation of banks, collateral management has an Operational and an Analytical component.
Operational Collateral Management focuses on the technical details of the collateral and its contractual relationship with the asset, the risk of which is being hedged,
Analytical Collateral Management focuses on the sustainable value of collateral and its ability to reduce capital consumption, and limit the provision for impairment of the asset whose risk is being hedged.
In the SAP Integrated Financial and Risk Artchitecture collateral is modeled in two different objects.
- As SDL-Financial Transaction to represent the contractual relationship between the collateral and the asset.
- As an RDL entry that represents the effective capacity of the guarantee to reduce exposures to Credit Risk and limit provisions for impairment.
Although a guarantee has a Nominal Value, it can have several different Credit Risk mitigation capacities, according to the Solvency calculation approach that the bank is following; Simplified Standardized, Comprehensive Standardized, Basic IRB and Advanced IRB.
Many times a group of guarantees covers a group of exposures; Determining the most efficient distribution of collateral to exposures reduces the capital consumed, which is the basis of Dynamic Collateral Management, one of the main Capital Optimization techniques.
HANA's high-performance in-memory computing capabilities make it easy to create simulation scenarios and stress tests, but before banks can take advantage of them, they must improve the representation of collateral in their information systems.
The Integrated Financial and Risk Architecture of SAP Banking provides a centralized collateral repository, facilitating regulatory reporting, calculation of risk-weighted asset provisions and impairment, stress testing of collateral values and simulation scenarios for capital optimization.
These are the guidelines followed by our team in the construction of our Capital Optimization system, built on top of the Integrated Financial and Risk Architecture.
Our Capital Optimization system speaks with the business processes of our clients' SAP Systems translating them in terms of Capital and Liquidity generation and consumption. With this information the Capital Optimization system measures the deficits and surpluses of capital and liquidity of the business processes and proposes financial instruments to offset these deficits and surpluses, optimizing the consumption of capital and liquidity 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 to contact 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/
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