Accounts Receivable Securitization with SAP Bank Analyzer. Chapter I.

Dear,

The main consequence of the Capital scarcity, and main trigger of the economic crisis which has followed the 2008 financial crisis, it is lack of credit. 

Credit is the most important capital allocation mechanisms in a modern economy. Quoting Ben Bernanke: “Credit has the ability to build a modern economy, but lack of credit has the ability to destroy it”

That’s the trigger of the current crisis, and the main constraint of the economic model that will emerge from it. As capital scarcity is not a temporary fashion, the financial system will be reshaped for offering alternative and more efficient capital allocation mechanisms.

A particularly relevant one is securitization, which is becoming a popular alternative to the scarce banking credits. 

Securitization has been used traditionally for allocating capital supported by many types of assets; mortgages, auto-loans, credit card debt obligations, etc.

But the tendency is to use it with many other assets. Today, we will see how many corporations are securitizing their receivables as a mechanism for financing their operations.

Trading receivables for cash is nothing new, corporations used to sell their receivables, with a discount, to factoring companies (or factoring divisions of banks). Unfortunately, in the current economic environment, the mechanism has become very expensive limiting its use.

On the other hand, replacing factoring with securitization presents difficulties too. Since 2008 financial crisis securitization industry has been seriously damaged, and only in the last months has experienced some recovery (influenced by the low interest rate policies of the last years).

For details, I recommend you to read the following paper of the OECD.

http://www.oecd.org/finance/financial-markets/48620405.pdf

As the low interest rates policy is not sustainable in the long term, new regulation is being proposed and implemented in order of making securitization more attractive to potential investors.

For details, it’s very recommendable the following report of the Bank for International Settlements.

http://www.bis.org/publ/joint26.pdf

For those of you, who don’t have the time to read the above documents, let me give you a brief conclusion.

Securitization industry is requiring a more stringent regulation and higher levels of disclosure and transparency for playing its role in the new environment of capital scarcity and limited economic growth.

That’s exactly what we can offer with Bank Analyzer; a robust technology framework for fulfilling the new regulatory requirements of the securitization industry.

As corporations use securitization will be required to comply with the regulatory framework of the industry, and software capable of fulfilling the regulatory reporting will be required.

The main difficulty is integrating non-banking sales and invoicing processes into the Bank Analyzer architecture. 

We already saw in previous posts that Bank Analyzer can be used by non-financial companies. 

http://sapbank.blogspot.com/2014/01/bank-analyzer-for-non-financial.html

http://sapbank.blogspot.com/2014/01/banking-and-trading-bank-analyzer-for.html

In a future post we’ll see how to integrate sales invoices in Bank Analyzer, so we’ll have all the necessary data for utilizing the system functionalities for supporting securitization requirements. 

At this point, let me remind you that the challenges of the capital scarcity are not limited to the financial system, but they impact the whole economy. As a consequence, the whole economic system that will emerge from this crisis will be driven by the efficiency paradigm.

Looking forward to read your opinions.

K. Regards,

Ferran.

Fees management and business transformation with SAP Banking. Chapter II.

Dear,

The traditional shape of the Financial System is being challenged by two drivers; capital scarcity and new business models facilitated by the technology revolution.

We saw last week how Banking fees are an example of the transformation from both perspectives; regulation and new competitors with alternative value propositions.

http://sapbank.blogspot.com/2014/09/fees-management-and-business.html

But the question remains, what are the traditional banks alternatives in the new scenario?

For answering the question we must remember that in the new environment capital is scarce, and whatever action we take it must be aligned with the principle of efficient capital management.

When banks executives plan to generate profits by providing a service to their customers, they must weight them with the cost of the allocated resources. Consequently, determining accurately service costs becomes a priority.

I mentioned last week, that SAP can offer best of breed functionalities for analyzing and tracking banking services costs; this is the basis for calculating the margin of the service, expected profits and return on the allocated capital.

In a financial contract, like a customer account, multiple services are provided, by internal and external service providers. Let’s have a look to some of them and the costs involved.

- Maintenance of the customer account provided by the customer account manager, or other Human Resources, supported by processes and technology.

- Withdrawal of cash in an ATM machine (from the bank or a third party bank). This means that the bank will support maintenance costs of its ATM machine or fees from another bank.

- Overdrawn facility, meaning that the bank has to allocate capital and liquidity for fulfilling the service.

Let’s have a look at the tools provided by SAP Banking for managing these scenarios.

Cost of processes.- We have several typologies that must be analyzed with different approaches.

Human resources costs can be direct like the bonus of the account manager, or indirect like call center manpower. In both cases the Management Accounting modules of SAP ECC, including Cost Center Accounting, Activity Based Costing will support the determination of the costs and consequently margins and profitability.

Assets amortization, including hardware, software, buildings, can be accurately calculated with ECC modules like Assets Accounting, and the ECC Controlling modules.

Data extracted from the calculations above will support the estimation of a tariff based standard cost that we can include in Bank Analyzer for determining process costs on contract level.

Fees cost from another bank can be posted directly on contract level (if provided by the billing interface with the third party). Additionally the withdrawal could happen in foreign currency, triggering P&L effects due to forex fluctuations between the withdrawal posting date and the clearing date with the third party bank. The whole construction is supported by Bank Analyzer AFI and Profit Analyzer.

Capital and funding costs (including impairment costs) related to the overdrawn facility are fully supported by the AFI and Profit Analyzer modules of Bank Analyzer.

All the above is just a brief description of the functionalities provided by SAP Banking, real scenarios are more challenging and interesting.

Looking forward to read your opinions.

K. Regards,

Ferran.

Fees management and business transformation with SAP Banking. Chapter I

Dear,
One of the main complains that consumers have about their bank is its fees policy.

When the customer is charged with fees, he requests to talk to a banking representative about it, he tries to get the fee reversed; and if this is not possible, he wants at least a reasonable explanation of the logic behind it.

On the other hand, management of fees is becoming a part of the bank’s revenue, particularly as very low interest rates and slow economy are making challenging for many financial institutions to improve their bottom line.

Banking fees had climbed every year since 1942, when the FDIC started collecting the data, and since then have been an important part of the relationship between the customer and his bank.

But this is going to change in the oncoming years, or at least this is the tendency we can see from a recent study of the US Federal Deposit Insurance Corp which shows that banking fees have dropped nearly 21% to $32.5 billion last year from $41.1 billion in 2009

http://www.marketwatch.com/story/bank-fee-income-in-decline-for-first-time-since-1940s-2014-09-03

What are the causes of this tendency change?

Mainly two reasons, new regulation and changes in market behavior.

For instance, Dodd-Frank establishes that the amount of any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction shall be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. 

http://www.icba.org/files/ICBASites/PDFs/DoddFrankActInterchangeProvisions.pdf

In addition, mobility paradigm provides customers with instant access to their bank balances from computers and smart phones making them less likely to spend more money than they have in their accounts, and consequently reducing overdraft fees.

In fact, the Fed released a survey in March showing that the most common use of smartphone banking apps is checking balances and tracking transactions.


http://www.federalreserve.gov/econresdata/consumers-and-mobile-financial-services-report-201403.pdf

But reduction on Banks profits for fees are just the first sign of something bigger, technology is changing the rules of the game, and new, better positioned players, are ready to get their part of the cake.

New players like Paypal, Google, Amazon,Apple or Alibaba are integrating Financial Services in their online platforms, and challenging the traditional Banks position in the market.

The dominant position of these companies in the Internet provides them with a competitive advantage which is growing with the introduction of new technologies like Near Field Communication.

http://en.wikipedia.org/wiki/Near_field_communicationhttp://www.reuters.com/article/2014/09/04/us-apple-iwatch-idUSKBN0GZ2A820140904

A good example is Apple, which with Apple Store and ITunes, possess one of the biggest databases of Credit Cards in the world, capitalizing the market knowledge provided by it for promoting their own payment methods is a matter of time.

http://www.bloomberg.com/video/apple-s-iwallet-can-be-new-creative-leap-sculley-_KSwAkmQQ5utfiwTu9XPdg.htmlhttp://www.cnet.com/news/how-an-apple-iwallet-might-work/

What SAP Banking can offer in the new scenario?

SAP has the know-how for tracking and analysing profits and costs for services, including multidimensional Profits and Loss Analysis, Activity 
Based Costing, Services Product Costing, etc.

This know-how has been incorporated to the SAP Banking business suite, including SAP Bank Analyzer which is fully integrated with the traditional profits and costs tracking solutions of SAP ECC (Management
Accounting).

I have been working recently in some projects with strong requirements in fees analysis and customers profitability,

I’ll give you some details about them in a future post.

Looking forward to read your opinions.

K. Regards,
Ferran.

November 2014 and milestones on the systemic change.

Dear,

In every process of change every day is different than the day before, but when change is completed historians mark in the calendar those special days which explain the change.

For instance, if we look at the history of modern economy, we will find special days like the Black Tuesday, when the markets decided to believe that the Roaring Twenties were over, triggering the most devastating stock market crash in the history of the United States and starting the Great Depression.

http://en.wikipedia.org/wiki/Black_tuesday

September 15, 2008 is also an interesting day, when the US authorities decided to let Lehman Brothers fall.

On the previous weekend several alternatives were put in the table; merging Lehman with Bank of America as they did with Merrill Lynch, bailing out the bank as they did with Bear Stearns or AIG, or mixed solutions like bailing out the bank and selling the good assets to Barclays.

But the decision was letting fall the fourth-largest investment bank in the US; changing the rules of the game for the first time in 80 years.

November 2014 will be another milestone; by then, the new Single Supervisory Mechanism of the European Central Bank will issue the results of the stress tests that will make public what is the “real” situation of the European Banking System.

Since the starting of the financial crisis in 2007/2008 we have seen several audits of the financial system, telling us that the financial system was solvent, and acknowledging some months later that more capital was needed.

http://en.wikipedia.org/wiki/List_of_bank_stress_tests

This time is going to be different as it has to be different, rumors say that 9 European banks are going to fail and 51 billion Euros are going to be needed for recapitalizing the system. Other rumours are more pessimistic and predict that 100 billion euros will be required.

http://www.reuters.com/article/2014/09/03/banks-goldman-survey-idUKL1N0R32IL20140903

Whatever the final figure is, the important consequence will be that the banking European system is undercapitalized.

But, only the European banks have solvency difficulties?

Of, course not.

In a global financial system everybody is connected and affected by the others; and what happens to one, it happens to the system.

Once again, look at the global debt clock.

http://www.economist.com/content/global_debt_clock

According to it, every Belgian carries a public debt of $45,405.40, every Briton $40,456.90, every French $37,989.90, every Spaniard $23,093.85, every Greek $27,189.68, etc.

And don't forget that on top of this mountain of public debt, the financial system is full of private debt, carried by corporations and individuals.

Are capital markets naive enough for believing that this debt can be paid?

Assuming that European banks, main holders of European public debt, need 51 billion Euros of Capital, with very low public debt interest rates; how much capital are they going to need, when capital markets decide to become anxious and raise the spreads?

I asked the same question to a reader of my blog, with management responsibilities in a European bank, who contacted me some months ago. He acknowledged that more capital is going to be needed and capital optimization is going to be a critical activity.

Unfortunately, he was not able of describing any concrete action for optimizing capital management on his bank.

Intriguing, isn't it?

By the way, in my opinion issuing shares or subordinated debt means increasing capitalization levels, not optimizing capital management.

Looking forward to read your opinions.

K. Regards,
Ferran.

Market Risk, Value at Risk and SAP Bank Analyzer.

Dear,

As we commented in previous posts, SAP Bank Analyzer does not have an strong Market Risk engine yet, particularly if we compare Bank Analyzer functionalities with other competitors like Sunguard.

Anyway, SAP Bank Analyzer is being designed with the holistic purpose of measuring and managing the main risks a financial institution is exposed to.

Credit Risk is very well covered with the correspondent Bank Analyzer risk engine, Liquidity Risk is very well covered by Bank Analyzer in combination with the SAP HANA-Liquidity Risk Management solution, and it’s a matter of time that SAP enhances the Strategy Analyzer sub-module of Bank Analyzer for covering the requirements of an strong Market Risk solution.

Strategy Analyzer sub-module of Bank Analyzer supports GAP Analysis and Net Present Value Analysis of the bank’s portfolio, examining the cash-flows at Financial Transaction or Financial Instrument level (contract level).

Strategy Analyzer requires to be provided with alternative, scenario based, market data sets and the contract Financial Conditions of the Financial Transactions and Financial Instruments. With this information, the Source Data Layer cash-flow generator will provide the scenario based cash-flows, and the risk engine calculator will give us the scenario based valuation of the portfolio, according to the correspondent market data set.

The complete modelization of the Financial Position Objects in the Bank Analyzer Results Data Layer supports the alternative scenario-based valuations of the portfolio.

Selecting properly the granularity of the characteristics contained in the Financial Database will guarantee a seamless transformation of the Results Data Layer positions on an analytical risk hierarchy.

All the above can be very useful to banks which have already implemented the Accounting for Financial Instruments module of Bank Analyzer.

After AFI has been fully implemented, enhancing the capabilities of Bank Analyzer for supporting GAP and Net Present Value analysis of the bank’s portfolio requires a relatively low effort.

But as I mentioned before, this is not enough to be considered a best of breed Market Risk technology, and I thought it would be a good idea to look at what functionalities should be included in SAP Bank Analyzer from Market Risk perspective.

GAP Analysis and Net Present Value Analysis represent the foundation of Market Risk Analysis as they told us the expected value and the cost of opportunity of our portfolio, in alternative or even stressed scenarios, but they don’t tell us what’s the statistical probability and the confidence level of the analysis.

In order of including this relevant information on the results of our analysis SAP Bank Analyzer should include an strong Value at Risk calculator, and this is precisely what SAP Bank Analyzer does not have today.

For those of you who are not familiar with the Value at Risk concept, Value at Risk is a statistical technique used to measure and quantify the level of financial risk in an investment portfolio over a specific time frame.

Value at Risk calculation is measured in three dimensions; the amount of potential loss (already provided by Net Present Value and GAP Analysis, but also the probability of that calculated loss, and the time frame in which the Market Risk event should occur.

This information is extremely useful to bank’s executives and risk managers, as it provides an statistical measure of the level of market risk the bank is exposed to, in every portfolio and by all risk hierarchy dimensions.

Additionally, detailed control of the evolution on the value at risk parameters will provide the basis for triggering alerts in case actual valuations are suffering deviations from the expected results, as Basel III agreement requires.

Looking forward to read your opinions.

Kindest Regards,

Ferran

Systemic crisis and capital scarcity. How did we arrive here?

Dear,
Since 2008 Financial Crisis, we decided to believe, conscious or unconsciously, that the crisis was just an accident; the sad consequence of the actions of a bunch of selfish, reckless banks’ executives, who blinded by greed, had converted the Capital Markets in a global casino of Credit Default Swaps, Mortgage Backed Securities and other exotic and incomprehensible financial instruments.
https://www.youtube.com/watch?v=iszwuX1AK6A
We can blame the bankers if that’s going to make us feel better; but if we really want to understand the magnitude of the problem, we need a little bit more than watching a great film.
If this was just a Banking crisis, it could be fixed by reshaping the banking system, but this is a systemic crisis which requires a systemic change. Obviously, in a capitalist model, the Financial System plays a protagonist role. Reshaping the financial System, it is a very important part of the solution, but it can’t be “the solution”.
For understanding this crisis it will help to have a look at the graphs below.
http://en.wikipedia.org/wiki/File:Oil_Prices_1861_2007.svghttp://upload.wikimedia.org/wikipedia/commons/e/e0/Components-of-total-US-debt.jpg
In the first graph, we see the historical evolution of the oil prices; as we can see, since the end of the Second World War till 1970’s decade, Oil prices had been kept relatively stable. And then as a consequence of the USA peak oil production and market cartelization, prices started to rise abruptly.
http://en.wikipedia.org/wiki/1973_oil_crisis
Oil is the most critical natural resource, and main responsible of the amazing period of growth the humanity has enjoyed since the starting of the Second Industrial Revolution.
http://en.wikipedia.org/wiki/Second_Industrial_Revolution
As higher prices of the resource responsible of feeding world’s economic engine made it less affordable, world’s economic growth should have slowed down, but it’s never easy to accept that unemployment rises, poverty increases and tomorrow we’re living worse than today.
Consequently, world’s leaders looked for an alternative source of growth that could maintain the economic engine running.
After some years of crisis, they found the alternative; global debt have been kept stable since the end of the Second World War, and it showed up as the alternative to finance economic growth, that could not be supported by cheap oil prices anymore.
The brilliant idea was replacing cheap oil by solvency, as the main resource to maintain economic growth.
Some constrains had to be eliminated; financial regulation, implemented after the 1930’s Great Depression limited the transformation; consequently a new era of financial deregulation started.
After that, maintaining economic growth by consuming financial solvency was possible. We started the new era of a Financial System driven by volume, starting a new phase of economic growth which was going to last during the following 30 years.
By 2008 financial solvency was consumed and became scarce, triggering the current systemic crisis, which started in the financial system, and spread on the following years, to the whole economy and society.
Six years later, we’re close to learn that we don’t have an alternative resource for maintaining historical rates of economic growth. Once again, our main problem is maintaining economic growth.
http://blogs.sap.com/banking/2011/12/07/its-growth-stupid/
As we’re in a capitalist system, banks are at the center of problem again, becoming protagonists of the transformation. When next November, European Central Bank audits make visible the financial system undercapitalization, we will start the new era of a financial system driven by efficient capital management, with multiple ramifications in the economy and society.
Looking forward to read your opinions.
K. Regards.
Ferran.

US General Attorney and SAP Banking.

Dear,

An interesting point, when we look at the transition to the new Financial System, it is the role played by the US General Attorney office. As Mr. Eric Holder made very clear some months ago, we've moved in six years, from a Financial System in which some corporates were too big to fail, to a new model in which no banks are too big to jail.

http://www.theguardian.com/world/2014/may/05/eric-holder-banks-criminal-investigation-jail

Since the starting of the Financial Crisis in 2008, Wall Street has been fined with more than 100 billion dollars.

http://www.foxbusiness.com/economy-policy/2014/06/13/huge-wall-street-fines-raise-calls-for-more-transparency-1287760936/

Bank of America, Wells Fargo, JP Morgan, BNP Paribas, Citigroup, Goldman Sachs and Morgan Stanley have received severe fines, impacting their results and reputation.

This week, we read in the media, that the New York Federal Reserve send last December, a letter to the executives of Deutsche Bank, accusing some of its US arms of releasing low quality, inaccurate and unreliable financial reports, and supporting its processes with inadequate auditing and oversight and weak technology.

http://www.reuters.com/article/2014/07/22/us-deutsche-bank-usregulators-idUSKBN0FR2BU20140722

What’s going on here?

Was everything perfect before, or the regulator has just discovered how to audit a Bank’s processes?

Not really, this is just a sign of the Systemic Change; for the last 30 years, the financial system has been deregulated and oriented to grow in volume, without looking at the capital consumed in the process. The objective was growth, no matter the resources, including solvency (main Financial System resource), consumed in the process.

http://en.wikipedia.org/wiki/Financial_deregulation#Finance

But today, global debt and natural resources scarcity are limiting global growth, making the Financial System severely under-capitalized.

We’re in a highly leveraged, fractional reserve, Financial System; which multiplies growth when growth is robust, but becomes insolvent with limited growth rates.

In the new scenario, we need a technology oriented to control; and new paradigms like Risk Adjusted Performance Management become the drivers.

Organizations, and particularly banks, objective cant't be selling and growing, but offering the best financial performance, weighted by risk (or what’s the same, capital consumption).

Regulators fines, which are going to be more frequent in the oncoming years, will be one of the incentives used, for “convincing” bank’s executives that they must align with the systemic change.

SAP Banking has the answer in terms of technology to the requirements of the new paradigm; it has been built with the objective of capital control and efficient management of resources, particularly with the Integrated Financial and Risk Architecture of Bank Analyzer.

But implementing SAP Banking is not an easy task; SAP Banking has a holistic data model, which makes it challenging to integrate with the current obsolete and over-simplified, Financial Information Systems.

Anyway, what’s the alternative for a bank’s executive; suffering fine after fine, till he aligns with the new paradigm?

Remember this; from now on, no Bank is too big to jail.

Looking forward to read your opinions.

K. Regards,
Ferran.