Activity Based Capital Optimization with SAP Banking.

Dear,

Many economists agree that we are at the end of a Financial System model.

For instance, Larry Summers, 71st Secretary of the Treasury for President Clinton and the Director of the National Economic Council for President Obama, has 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/

For decades strong economic growth has made Capital abundant, but this started to change in the last decades of the last century when economic growth became weaker and global debt rose until becoming the highest in the history of capitalism.

                              Source: World Bank.

Excess of debt consumes Capital and weak economic growth prevents Capital generation, this is why Capital has become scarce, and Capital is the most important resource of the Financial System.

If Capital is scarce the priority is Capital Optimization and this is the driver of the New Financial System that will emerge from this crisis.

Capital Optimization requires maximizing the Return of Investments weighted by Capital consumption.

Capital consumption is directly proportional to the Risk Weighted Assets, this means that Optimizing Capital is synonymous with reducing the risk of the economic activities, and risk is always reduced by applying information.

 

As the economy becomes a Information based Economy, processes have become more important than tangible assets; you can look at the examples of Amazon, Google, Facebook, Netflix, etc.

In order to optimize the Capital consumed in a process we need to determine the value generated by the process, the assets we have to allocate to the process and the risk of suffering losses on the assets (tangible & untangible) allocated to the process.

The Activity Based Costing of the SAP Enterprise Core Components System, in combination with other SAP ECC modules like Profit Center Accounting, Production & Internal Orders, and specially with the multi-dimensional accounting capabilities of the Universal Journal of S4 HANA are an excellent starting point.

ABC Processes, Profit Centers and Orders support the tracking of value generation with sophisticated activity cost driver templates. At the end "activating" a cost is estimating the capacity of the process of generating value from the cost.

The estimation of the value generation is the first step on the Capital Optimization process.

The following step is estimating the risk exposure associated to the value generation. When we establish the link between the risk exposure and the value generation drivers, we will be in the position of reducing the coefficient of capital consumption for value generation (by allocating the information that will reduce the risk).

Processes of the Information economy come with enormous amount of data, this is growing every second  and it is growing much faster with the implementation of new technologies like the Internet of Things.

Not all the data have the same relevancy on reducing the capital consumption of the process and the objective is identifying the relevant data, structuring the data in relevant information and finally developing models for integrating the information in the process, reducing risk and consequently Capital Consumption.

For the last 12 years our team has analyzed business processes modeled in SAP System for modeling the cost drivers of these processes in terms of Capital consumption and generation.

With this information, we can optimize the expected profit of a business process, weighted by its Capital consumption, which is the objective 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/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

Specialized Lending, Capital Flows Tracking and Capital Optimization with SAP Banking.

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/~/media/mckinsey/dotcom/client_service/risk/working%20papers/38_capital%20management%20bankings%20new%20imperative.ashx

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/article/eu-banks-regulator/eu-watchdog-says-banks-face-135-billion-euro-capital-shortfall-idINL8N2433U3

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/papers.cfm?abstract_id=3638031

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/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

Why will SAP Banking be the leader in Capital Optimization?

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

The future of Banking is Capital Optimization.

 Dear,

For decades, Global Debt has grown till rising historically high levels. At the same time, overconsumption of natural resources reduced the future potential growth.

Debt consumes Capital and Limited Economic Growth reduces Capital generation; if the system consumes more Capital than what it generates, makes Capital scarce.

As Capital is the most important resource of the economic system and it has become scarce, there is no higher priority than Capital Optimization.

Just two links where you can check what I just said.

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

https://www.imf.org/external/pubs/ft/fandd/2020/03/larry-summers-on-secular-stagnation.htm

Actually, Capital Optimization has been a concern for years, most people understand that we can not grow unlimitedly in a world of limited resources (and Solvency/Capital is also a resource).

In the 2008 Financial Crisis, it became clear that Solvency is limited, and some recognized advisors gave a warning that Capital Optimization had become a critical activity.

A very good example is McKinsey’s paper of 2012 "Capital management: Banking's new imperative"

https://www.mckinsey.com/business-functions/risk/our-insights/capital-management-bankings-new-imperative

But there are many others;

https://www.oliverwyman.com/content/dam/oliver-wyman/v2/publications/2013/jun/Oliver_Wyman_RWA_Commercial_and_Retail_Banking.pdf

https://www.oliverwyman.com/content/dam/oliver-wyman/global/en/2015/jan/Efficient%20Regulatory%20Capital%20Management.pdf

Unfortunately, most of these documents give general advice, but in my opinion, failed on describing a concrete proposal for Capital Optimization.

I have been an SAP Consultant for nearly 30 years, first in the "real economy" (Chemical, Retail, Manufacturing, Telco, etc.) and since 2006 in Analytical Banking.

Capital Optimization has always been at the core value proposition of SAP; reducing Production, Storage and Transportation costs by collaborating and integrating processes. For instance; SAP Vendor Managed Inventory scenarios are clear examples of Capital Optimization.

For me, it was clear that the answer to Solvency and Liquidity Optimization requirements of the Financial System had to be driven by SAP, and in 2009 I finished the theoretical analysis of what should be a Capital Optimization model for Solvency and Liquidity.

You can find a short and simplified description in this video.

https://www.youtube.com/watch?v=GkcVF5CWVrU

Physics Principles teach us that Capital Optimization is determined by the capacity of reducing the entropy of a system, like a production process, a combustion engine, or a lithium battery.

Same principle applies to Solvency and Liquidity; Optimizing Financial Capital, for instance reducing Risk Weighted Assets, requires reducing the uncertainty (entropy) of the system with information. The question is, where and how to collect the necessary information?

With my experience as SAP Consultant in the "real economy" I knew that SAP is the world’s biggest collector of corporate information. As I mentioned before, companies share the information stored in their SAP systems for reducing Production and Transportation costs, improving customer service levels, etc. All these are examples of Capital optimization.

Same principle applies to Solvency and Liquidity, only by sharing information between Financial Services and Real Economy we can optimize Solvency and Liquidity; and if SAP is the biggest collector of corporate information (approx. 70% of the world’s GDP), the answer is clear.

Every process in the real economy, from a sales order to a production operation consumes and generates capital and liquidity (inflows and outflows of the process), the more efficient the process is, the higher the outflows are, minimizing the inflows. But the process requires a business process maturation, and this time-mismatch is covered by the Financial System.

If you model the capital and liquidity consumption of all the inflows and outflows (financial and non-financial) involved in a business process, you have the key for opening the capital optimization gate.

For the last 8 years a group of partners have worked on this, modelling the business events on the real economy for calculating how they consume and generate capital and liquidity, for answering the question of the solvency and liquidity that must be incorporated to the business processes for optimizing the capital of the system.

The final outcome is an SAP Banking system which speaks with the SAP systems of the corporations managed with SAP systems, and offers them Financial Services, optimizing the Capital and Liquidity of the System.

In a few words, we have translated the principles of the Vendor Managed Inventory scenarios to Financial Services, so instead of optimizing Inventory Levels or Production Capacity, we optimize Solvency and Liquidity.

We have run several prototypes and demos, and we feel ready to offer the service and we are looking for partners willing to be part of this endeavor.

If any of you is interested, you can send me an email to ferran.frances@capitency.com

Kind 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

Targeted Review of Internal Models & SAP Analytical Banking framework.

Dear,

On March the 4th 2015, the European Banking Authority (EBA) issued a discussion paper analysing the future of the Internal Rating Based Approach in which talked about “a lack of trust in the use of IRB models”.

https://eba.europa.eu/regulation-and-policy/credit-risk/discussion-paper-on-the-future-of-the-irb-approach

For years, there has been a growing concern amongst the Banking supervisory authorities, regarding serious inconsistencies and high variability,  in the capital requirements calculated by different bank’s internal models.

According to this paper,  some of the main sources of differences in RWAs,  that cannot be explained by the different risk management practices of the Financial Institutions,  are the definition of Default, Probability of Default calibration and Loss Given Default calibration.

Consequently, in this paper,  EBA set out an agenda for further improvements and clarifications in the regulatory framework for IRB models.

In February 2017, the ECB made public the ECB guide to internal models,  with the objective of helping Banks to prepare the on-site inspections. The Guide presents the ECB’s proposal,  on the supervisory practices,  and how should be applied across the Euro area. Finally, the on-site assessments will be used to identify compliance gaps as against the standards and principles defined in the Guide.

https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.guidetointernalmodels_consolidated_201910~97fd49fb08.en.pdf

The targeted review of internal models, or TRIM, is a project to assess whether the internal models currently used by banks,   comply with regulatory requirements, and whether their results are reliable and comparable. Banks can use internal models to determine their Pillar 1 own funds requirements, i.e. the minimum amount of capital they must hold by law.

One major objective of TRIM is to reduce inconsistencies and unwarranted variability,   when banks use internal models to calculate their own funds requirements.

TRIM will investigate if a bank meets the minimum requirements to use the internal model approach,   and the on-site investigation will focus on the compliance of the model requirements, examine the portfolio on which the internal model is applied and examine the adequacy and adaptability of business processes related to the model.

TRIM presents important challenges to banks; in my opinion the main one is that most banks present heterogeneous and very low quality data,   spread in different silos, lacking on tracking capabilities to the bank’s Operational Systems.

SAP Analytical Banking framework, including Credit Risk Analyzer, Financial Products Subledger and Financial Services Data Management, provides a set of tools for fulfilling the requirements of TRIM.

- The Source Data Layer provides a Central Repository of homogeneous Operational Data (Master and Transaction Data).

The Primary Data Objects of the Bank Analyzer Source Data Layer have been designed to cover the Analytical and Regulatory requirements, independently of the capacities/limitations of the Operational Banking System. Bank’s architects can take advantage of these standard templates,  as a basic reference, trusting that the regulatory requirements will be fulfilled, and performing a gap analysis which helps them to identify data inaccuracies and redundancies.

- The Extract, Transformation and Loading capabilities of SAP Smart Data Integration in Premise and in the Cloud, including the high-performing capabilities of SAP HANA for storing and managing very-high volumes of data, reducing intermediate tables and assuring the referential integrity of the database.

- SAP Financial Services Data Management supports redundancies elimination by managing the bank's data,  with a single-source-of-truth approach,  through a unified data model.

- Reporting capabilities make it easier to reconcile results from different reports,  because different reports use the same source data and the same data model for the business semantic.

- The Historical Database provides the functions for Collecting Data from the Operational Banking Systems, Calculation of the Default Rates, Data Storage for the Calibration of the model and Audit and Historization capabilities.

- The Credit Exposure calculation determines the risk key figures,  for exposures and their collateral, meeting the requirements of the Basel III Accord.

At the same time that TRIM audits are taking place, other regulatory developments are happening. On January 2013, the Bank for International Settlements published the standard 239 whose subject is: "Principles for effective risk data aggregation and risk reporting"

https://www.bis.org/publ/bcbs239.htm

In April 2020, the Basel Committee on Banking Supervision published its latest progress report on banks' implementation of the Principles for effective risk data aggregation and reporting.

https://www.bis.org/bcbs/publ/d501.htm

The main conclusion is that none of the banks are fully compliant with the Principles,  in terms of building up the necessary data architecture and, for many, IT infrastructure remains difficult.

BCBS 239 demands coherency on the Risk Parameters Calculations and their Finance and Risk interpretations,  and this requires an effective collaboration between Finance and Risk divisions of the banks.

 

In my experience, bank’s information systems lack a common architecture and holistic data-model facilitating the reconciliation.

This is the foundation of the Integrated Financial and Risk Architecture of Bank Analyzer. And this integration has improved,  significantly,  with SAP S/4HANA for Financial Products Subledger.

Looking forward to reading your opinions.

K. Regards,

Ferran.

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

Liquidity Optimization with SAP Central Payments.

Dear,

Integration has always been the key word for SAP; 30 years ago we integrated Departments of Companies, 20 years ago we integrated Companies in Companies Groups, 10 years ago we integrated Companies Groups with other Companies Groups with intergroup processes.

Integration facilitates sharing information which is the basic requirement for efficiency, but implementing a fully integrated system presents challenges.

The best example of the SAP integration capabilities is the Single Global SAP System Instance Architecture which reduces Operational Costs and Increases Visibility of the Business Processes.

Implementing a Single Global SAP System Instance has become a common objective in most organizations but it requires time and budget due to organizational and cultural issues, Acquisitions, Merges, etc.

For this reason SAP has developed alternatives for partial integration technologies of business processes, which provide more limited efficiency than a Single Global System Instance, but require much less effort to implement.

SAP Central Finance is a great achievement in this area, and Central Payments a very good example of it.

The basic idea of the Central Payments functionality is integrating the Accounts Receivable and Accounts Payable business processes of a Companies Group in a Central Finance System, but keeping other business processes in the Local Satellite Systems, reducing the integration effort and speeding the integration project up.

This approach is compatible with the Global System Instance one, so the Program Manager can build a roadmap in which some affiliated companies are fully integrated and in others the integration is limited to the AP & AR functionalities in a first stage, followed by a full integration later in time.

When we enable the Central Payment functionality in a Company Code the System replicates the Open Items from the satellite system to the Central Finance System, and sets the status Technically Cleared in the Open Item of the satellite system, then the clearing process continues in the Centralized System.

SAP Central Payments also supports the integration with non-SAP System, but in this case the replication and technical clearing functionalities of the satellite system Open Items must be provided by a third-party or developed during the implementation project.

Building a Centralized Payments System has many advantages, amongst others.

• Liquidity Optimization.- With this approach we can have a Companies Group vision of the cash position. With this information the Central Treasury department can calculate the net liquidity gaps & surpluses of the group reducing the financial costs and improving the management of the short-term investment opportunities. This vision is limited to the short-term liquidity position, as commitments (sales orders, purchase orders, etc.) are not integrated in the current version of Central Payments.

• Additionally, we can implement In-House-Cash and Bank Communication Management functionalities on top of the Central Payments System for managing the intra-group lending requirements and reducing banking commissions and operational costs.

• Opens the gate for the Central Implementation of the newest SAP Leonardo most visionary functionalities like SAP Machine Learning Cash Application, deploying the capabilities of machine learning intelligence for the companies group open items and payment matching process.

Looking forward to reading your opinions.

K. Regards,

Ferran.

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

Limits of Growth, Capital Scarcity and the SAP Integrated Financial and Risk Architecture.

Dear,

Since 12 years ago I wrote the first SAP Banking post in this community, I always tried to explain that we are in the middle of a Systemic Transformacion of the Financial System, from a model based in Volume to a model based in Capital Optimization.

In theory, Optimizing Capital is a logical activity, it means determining the price of a Financial Instrument by taking all the costs into account (including Capital costs), or in other words, maximizing the return of a Financial Instrument (or a Portfolio) weighted by its Capital Consumption.

In an economic environment enjoying strong economic growth and limited debt, Capital is abundant. The world enjoyed this economic environment for most of Capitalism history.

If Capital is abundant there is no much difference between maximizing the return of a Financial Instrument or maximizing the return of the Financial Instrument weighted by Capital consumption.

In some sense, this has been a common understanding in the economic model which emerged after the Second World War. For instance, in the early 60s, the US President John F Kennedy popularized the quote "A rising tide lifts all the boats" meaning that the focus of an economy should be growth.

Unfortunately, the current economic environment is very different; today's economy has the most limited growth of the Capitalism history and the same applies for global debt which is also the biggest in history.

This was systematically analyzed in the early 70s by the Club of Rome that Commissioned the report "The Limits of Growth" which clearly established the unsustainability of an economic model sustained by unlimited growth in a World of Limited Resources.

 

https://en.wikipedia.org/wiki/The_Limits_to_Growth

Decreasing is not an option, natural resources scarcity and pollution make unlimited growth impossible. Some economists predict that scientific discoveries and technology improvements will find new ways to fuel economic growth, although simple observation of the rising global debt and dependency of the fossil sources of energy make clear that this is not the case.

It is not my intention to start a debate about the Limits of Growth, in my opinion there are many reliable sources of information where you can validate the conclusions of the Club of Rome report. If you think these conclusions are not valid, this blog will not be interesting to you.

The Financial System decisions are based on the hypothesis that, in general, counterparties fulfill their obligations. Consequently, the logical investment strategy is allocating Capital on those activities with higher expected returns, paying less attention to the risk of the investment.

But when Capital becomes scarce, Risk management becomes critical and it must be at the center of the Financial decisions.

This is a principle brilliantly explained in 2005 by the Chief Economist of the International Monetary Fund and future Governor of the Reserve Bank of India, Dr. Raghuram Rajan.

https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp082705

Managing Risk is mainly managing Information and consequently Information Systems are at the foundation of Risk Management.

I have been SAP consultant for nearly 30 years, and the last 14 focused in Analytical Banking. For years I have expected the transformation of the banks information systems, a transformation that has not started yet.

For instance, the Financial Statements are still considered one of the main deliverables for auditing the health of a bank; Financial Statements with tens of thousands of GL-Accounts, with very limited tracking capabilities of the source of the Account's balance.

Additionally, Accounting Principles offer very limited capacity for representing critical solvency magnitudes.

Can any of you explain to us how to properly model commitments, probabilities of default, loss given defaults, value at risk or risk weighted assets in a Financial Statement?

I know that Solvency is reported with specific frameworks like FINREP, COREP, FFIEC, etc. but they are built by collecting most of the data from the Financial Statements, which are not suited for storing Solvency Information.

On the other side, the SAP Integrated Financial and Risk Architecture offers a multi-functional representation of the main bank's regulatory requirements, with a balanced and reconcilable representation of the economic events in Accounting and Solvency magnitudes.

With the integrated analytical capabilities of the Integrated Financial and Risk Architecture is feasible to answer the question, "what is the return of a Financial Instrument weighted by its Capital Consumption?". This is for me the main question and the starting point of a Capital Optimization Process.

Looking forward to reading your comments.

K. Regards,

Ferran.

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