Wednesday, September 5, 2012
You can leave your hat on.
Dear,
On 1986 Kim Basinger and Mickey Rourke starred a film which was going to break myths and be remembered for years; Nine 1/2 Weeks http://www.imdb.com/title/tt0091635/.
Starting September we’re going to see a movie which is also going to break myths and be remembered for years. Myths always need time for being broken, and they’re remembered for years.
4 years ago we saw the Financial Crisis starting with Lehmans Brothers bankruptcy and the biggest Banking bail out of the history. Since then we’ve seen how the world’s economy has lightly improved for a short period and severely deteriorated a few months later.
Once and again we’ve seen how a bailout of a problematic country in Europe (Greece, Portugal, Ireland, Spain), or a Quantitative Easing in US was going to solve the problem and some months later we saw an economic relapse.
After every cycle the economy has always been a little bit weaker than in the previous one. This is a typical example of a Liquidity Trap
http://sapbank.blogspot.de/2012/09/government-ratings-collaterals-and.html
Beginning of 2011 we discussed here that this is not a liquidity issue but a solvency one
Simplifying, all those government actions have eased the tensions in the Financial System by injecting liquidity in a system in which the real problem is lack of solvency generated by a huge debt that simply cannot be paid.
http://sapbank.blogspot.de/2012/09/why-do-they-call-it-love-when-they-mean.html
By injecting liquidity and easing the financial tensions, governments are buying time. I’m not criticizing this approach; as Mr. Mario Draghi (president of the ECB) said some days ago, “buying time is not a minor achievement” http://mobile.reuters.com/article/topNews/idUSBRE83O0CC20120425?feedType=RSS&feedName=topNews
The question is “Buying time”, for what?
For letting people accepting that solving the crisis will require trade sovereignty for debt reduction, with all the social, economic and political implications that this agreement has.
This is the real myth to be broken, maybe not in nine and half weeks, but sooner than expected.
Reducing the debt to sustainable levels is a requisite for recovering trust and solvency, and giving sovereignty is a requirement for coordination and efficient capital management.
The final deal will be painful for both sides, borrowers giving individual freedom and lenders accepting that they will not recover part of the invested Capital.
At the end, if you owe the bank $100, that’s your problem. If you owe the bank $100 million, both parts have a problem.
By the way, a great song http://www.youtube.com/watch?v=4b04jq7NB1s
Looking forward to read your opinions.
Regards.
Ferran
Sunday, September 2, 2012
Basel II and Revisions to the Capital Requirements Directive.
Dear,
You will find below the press communication about the conclusions of the Basel Committee in Banking Supervision regarding the proposal of the Committee for the new Capital Regulation (unofficially the new Basel III Capital Requirements).
As expected, the communication highlights the necessity for increasing the minimum regulatory levels and quality of all the Capital Components (Tier 1, Tier2 and Tier3) and liquidity.
Reinforces the recommendation of the implementation of “Countercycle Provisions Systems”. As you probably remember we discussed a proposal for building a Countercycle Provisions Systems on the posts lasts weeks and the competitive advantage of SAP Bank Analyzer for supporting the model requirement.
Recommends strength the Pillar 2 supervisory process. This is a requirement very well supported by Bank Analyzer-Basel II with its very powerful reporting capabilities and integrated model of the IFRA Architecture.
Communicates that the full package of new standards should be available for the end of the year.
The document is available at http://www.bis.org/speeches/sp100503.htm
Kindest Regards.
Ferran.
You will find below the press communication about the conclusions of the Basel Committee in Banking Supervision regarding the proposal of the Committee for the new Capital Regulation (unofficially the new Basel III Capital Requirements).
As expected, the communication highlights the necessity for increasing the minimum regulatory levels and quality of all the Capital Components (Tier 1, Tier2 and Tier3) and liquidity.
Reinforces the recommendation of the implementation of “Countercycle Provisions Systems”. As you probably remember we discussed a proposal for building a Countercycle Provisions Systems on the posts lasts weeks and the competitive advantage of SAP Bank Analyzer for supporting the model requirement.
Recommends strength the Pillar 2 supervisory process. This is a requirement very well supported by Bank Analyzer-Basel II with its very powerful reporting capabilities and integrated model of the IFRA Architecture.
Communicates that the full package of new standards should be available for the end of the year.
The document is available at http://www.bis.org/speeches/sp100503.htm
Kindest Regards.
Ferran.
Why Bank Analyzer?
Dear SAP Banking Community members,
Some days ago I had a very interesting conversation with a colleague about the “effort” necessary for implementing Bank Analyzer.
In my opinion, a common mistake when we evaluate Bank Analyzer is thinking that BA is “just” a tool for generating regulatory deliverables (Basel II-Regulatory Capital or IFRS-Accounting).
With Bank Analyzer, we try to capture on an integrated data-model (Financial Database), all the economic events which have, or can have, an impact on the Market and Credit Risk that the Bank is exposed to. And from it, evaluate the processes which generate Profit and Liquidity.
Capturing those economical events and represent them in an integrated data-model is not an easy task, it requires a relevant amount of business and technical knowledge. Additionally, many Transactional Banking Systems don’t have the integrated vision of SAP, which makes more difficult to extract the necessary operational data for feeding the integrated risk data-model of BA.
But, what’s the pay back of all this effort?
We’re moving to an economic world in which efficiency is not a competitive advantage, it’s the key to survival.
Efficient management requires looking carefully at the utilization of the critical resources, and the most critical resources of a Bank are Capital for hedging risk, and Liquidity for responding to its liabilities.
That’s exactly what Bank Analyzer is about; with all the data provided by the Financial Data Base, the Bank’s managers have the necessary information for looking forward and evaluate the potential risks before they happen.
Taking decisions before their competitors, managing their assets and liabilities before the economic events of this globalized world affect their value.
Does this worth the effort?
In my opinion it does.
Looking forward to read your opinons.
Kindest Regards.
Ferran.
Some days ago I had a very interesting conversation with a colleague about the “effort” necessary for implementing Bank Analyzer.
In my opinion, a common mistake when we evaluate Bank Analyzer is thinking that BA is “just” a tool for generating regulatory deliverables (Basel II-Regulatory Capital or IFRS-Accounting).
With Bank Analyzer, we try to capture on an integrated data-model (Financial Database), all the economic events which have, or can have, an impact on the Market and Credit Risk that the Bank is exposed to. And from it, evaluate the processes which generate Profit and Liquidity.
Capturing those economical events and represent them in an integrated data-model is not an easy task, it requires a relevant amount of business and technical knowledge. Additionally, many Transactional Banking Systems don’t have the integrated vision of SAP, which makes more difficult to extract the necessary operational data for feeding the integrated risk data-model of BA.
But, what’s the pay back of all this effort?
We’re moving to an economic world in which efficiency is not a competitive advantage, it’s the key to survival.
Efficient management requires looking carefully at the utilization of the critical resources, and the most critical resources of a Bank are Capital for hedging risk, and Liquidity for responding to its liabilities.
That’s exactly what Bank Analyzer is about; with all the data provided by the Financial Data Base, the Bank’s managers have the necessary information for looking forward and evaluate the potential risks before they happen.
Taking decisions before their competitors, managing their assets and liabilities before the economic events of this globalized world affect their value.
Does this worth the effort?
In my opinion it does.
Looking forward to read your opinons.
Kindest Regards.
Ferran.
Capital Management-Chapter V (Dynamic Collateral Management).
Dear SAP Banking Community members.
Yesterday I had a very interesting conversation with a friend, specialist on Credit Derivatives Contracts in Energy markets, about how the increasing requirements of Disclosure and Solvency are rising the prices of Credit Derivative Products.
In my opinion, those higher prices are a direct consequence of the higher cost of the main and necessary resource for offering those hedging Financial Instruments, “Solvency”.
A classical method for Risk Mitigation (solvency improvement), recognized by all the Basel agreements and most of solvency regulations, is collateralization. Consequently, from some perspective, collateral rights are a component of the very critical resource that we call Solvency.
On collaterals management we can follow two approaches.
• Static Collateral Management. The Bank has an exposure (receivable or asset) and requires a collateral right for hedging the Default Risk of the exposure. Normally, the higher the exposure, the higher the collateral that the Bank will require. The collateralization degree will be determined by the difference between the amount of the Exposure and the value of the collateral.
• Dynamic Collateral Management. On the other hand; according to the Basel agreement, Capital consumption (solvency) does not depend directly on the Bank’s exposure, but on the Bank’s exposures “weighted” but the exposures’ risk. Consequently collateralization degree depends on the risk of the exposure, and it changes (dynamically) with it.
The difference on the above approaches has relevant consequences for Capital Management.
In the first case, collateralization does not depend on the exposure’s risk (rating), but only on its size (the risk of the collateral value is somehow considered if we update the collateral value regularly), while in the second approach the risk of the exposure is integrated on the Risk Weighted Assets Calculation and consequently on the collateralization degree.
The second approach is more sensitive on risk and permits a more efficient management of the Collateral, and consequently, the Solvency and Capital.
By the way, as the solvency becomes a more expensive resource, the work of the Counterparty Valuation Adjustment (CVA) desks becomes a more critical activity.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Yesterday I had a very interesting conversation with a friend, specialist on Credit Derivatives Contracts in Energy markets, about how the increasing requirements of Disclosure and Solvency are rising the prices of Credit Derivative Products.
In my opinion, those higher prices are a direct consequence of the higher cost of the main and necessary resource for offering those hedging Financial Instruments, “Solvency”.
A classical method for Risk Mitigation (solvency improvement), recognized by all the Basel agreements and most of solvency regulations, is collateralization. Consequently, from some perspective, collateral rights are a component of the very critical resource that we call Solvency.
On collaterals management we can follow two approaches.
• Static Collateral Management. The Bank has an exposure (receivable or asset) and requires a collateral right for hedging the Default Risk of the exposure. Normally, the higher the exposure, the higher the collateral that the Bank will require. The collateralization degree will be determined by the difference between the amount of the Exposure and the value of the collateral.
• Dynamic Collateral Management. On the other hand; according to the Basel agreement, Capital consumption (solvency) does not depend directly on the Bank’s exposure, but on the Bank’s exposures “weighted” but the exposures’ risk. Consequently collateralization degree depends on the risk of the exposure, and it changes (dynamically) with it.
The difference on the above approaches has relevant consequences for Capital Management.
In the first case, collateralization does not depend on the exposure’s risk (rating), but only on its size (the risk of the collateral value is somehow considered if we update the collateral value regularly), while in the second approach the risk of the exposure is integrated on the Risk Weighted Assets Calculation and consequently on the collateralization degree.
The second approach is more sensitive on risk and permits a more efficient management of the Collateral, and consequently, the Solvency and Capital.
By the way, as the solvency becomes a more expensive resource, the work of the Counterparty Valuation Adjustment (CVA) desks becomes a more critical activity.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Capital Management-Chapter IV (Hedge Accounting).
Dear SAP Banking Community members.
Some weeks ago I was talking to a client (thanks Jason and Lee) about an Integrated Planning Model for Retail Banking in which I’ve been working, and for some minutes we discussed about the topic of Risk Hedging and Regulatory Capital consumption.
A common mistake is considering the calculation of the Risk Weighted Assets of a Bank’s portfolio a static activity for fulfilling regulatory requirements.
Even if the risk department of the Bank has a clear protocol for Hedging Risk of “potentially dangerous” investments, they usually lack a holistic and dynamic analysis of the bank’s business segments or micro-portfolios with common risk characteristics.
From that perspective, Hedge Accounting and Capital management are isolated activities, when in fact they’re both sides (accounting and solvency) of the same mirror (Risk Hedging).
Even more, commonly we hear the expression “hedge accounting adjustments” for referring to Hedge Accounting as an isolated activity; like the premium of proving to have run successfully some regulatory effectiveness tests (IAS 39), as it was something separated of the core value of the Bank's portfolio.
The main driver of efficient Capital Management is visibility of Capital Consumption. By using risk mitigation techniques we reduce the Capital consumption. That reduction is the visible shape of the risk hedging effectiveness of the technique from the solvency perspective.
But on the other hand, the effectiveness of the risk mitigation technique will trigger the “Hedge Accounting adjustment”, as the other visible effect of having an effective risk mitigation relationship.
Does it have sense to look at the two sides of the same reality as separated entities? In my opinion it does not.
Looking forward to know the opinion of other community members.
Kindest Regards.
Ferran.
Some weeks ago I was talking to a client (thanks Jason and Lee) about an Integrated Planning Model for Retail Banking in which I’ve been working, and for some minutes we discussed about the topic of Risk Hedging and Regulatory Capital consumption.
A common mistake is considering the calculation of the Risk Weighted Assets of a Bank’s portfolio a static activity for fulfilling regulatory requirements.
Even if the risk department of the Bank has a clear protocol for Hedging Risk of “potentially dangerous” investments, they usually lack a holistic and dynamic analysis of the bank’s business segments or micro-portfolios with common risk characteristics.
From that perspective, Hedge Accounting and Capital management are isolated activities, when in fact they’re both sides (accounting and solvency) of the same mirror (Risk Hedging).
Even more, commonly we hear the expression “hedge accounting adjustments” for referring to Hedge Accounting as an isolated activity; like the premium of proving to have run successfully some regulatory effectiveness tests (IAS 39), as it was something separated of the core value of the Bank's portfolio.
The main driver of efficient Capital Management is visibility of Capital Consumption. By using risk mitigation techniques we reduce the Capital consumption. That reduction is the visible shape of the risk hedging effectiveness of the technique from the solvency perspective.
But on the other hand, the effectiveness of the risk mitigation technique will trigger the “Hedge Accounting adjustment”, as the other visible effect of having an effective risk mitigation relationship.
Does it have sense to look at the two sides of the same reality as separated entities? In my opinion it does not.
Looking forward to know the opinion of other community members.
Kindest Regards.
Ferran.
Capital Management-Chapter III (Stress Testing).
Dear SAP Banking Community members,
As discussed during the last few weeks, the necessity for a systematic capital management system for all major banks is becoming more and more critical.
From that perspective, let me recommend you to read the following article in the Guardian.
http://www.guardian.co.uk/business/2010/nov/23/europeanbanks-banking
The article highlights the European bank’s share prices after the Ireland bailout. Obviously, the market fears that the losses of some European banks due to their investments in the Irish economy could cause the banks to be undercapitalized or even default.
As you might know capital management requires efficient utilization of capital, and as we are all aware of the risks of having an undercapitalized financial system; credit crunch - no investment/credit, and as the saddest consequence, economic recession.
But the contrary is not desirable either, having an over-capitalized financial system means that very critical resources are frozen without generating any profit for the banks, the shareholders or the economy in general.
Thus it seems natural that an efficient utilization of capital would constitute keeping the capital levels of the bank slightly above
Regulatory Capital Levels (according to the solvency regulation).
- If a bank’s capital is below the regulatory levels: undercapitalized and potentially in insolvency.
- If a bank’s capital is much higher than the regulatory levels: free capital is not invested which is preventing the institution from making additional profits (something that would upset the shareholders).
Now the risk weighted assets calculation is the key for determining the free capital available for future investments, and is consequently a key factor for the bank’s business planning.
Determining the free capital is not an easy task, as any financial investment, by definition, is a dynamic process.
Changes in the economic environment or the risk associated with financial investments produces a different result in the calculation of risk weighted assets, and consequently the bank’s capital consumption.
In my opinion, stress testing is the key. Stress testing has been very important in determining the strength of a financial system in order to support losses in portfolio values and is subsequently also a key component of efficient capital management. From a business planning perspective stress testing is the key for determining the “buffer” of free capital a bank has available for its business planning.
What do you think?
I am looking forward to read your opinions.
Kindest Regards.
Ferran.
As discussed during the last few weeks, the necessity for a systematic capital management system for all major banks is becoming more and more critical.
From that perspective, let me recommend you to read the following article in the Guardian.
http://www.guardian.co.uk/business/2010/nov/23/europeanbanks-banking
The article highlights the European bank’s share prices after the Ireland bailout. Obviously, the market fears that the losses of some European banks due to their investments in the Irish economy could cause the banks to be undercapitalized or even default.
As you might know capital management requires efficient utilization of capital, and as we are all aware of the risks of having an undercapitalized financial system; credit crunch - no investment/credit, and as the saddest consequence, economic recession.
But the contrary is not desirable either, having an over-capitalized financial system means that very critical resources are frozen without generating any profit for the banks, the shareholders or the economy in general.
Thus it seems natural that an efficient utilization of capital would constitute keeping the capital levels of the bank slightly above
Regulatory Capital Levels (according to the solvency regulation).
- If a bank’s capital is below the regulatory levels: undercapitalized and potentially in insolvency.
- If a bank’s capital is much higher than the regulatory levels: free capital is not invested which is preventing the institution from making additional profits (something that would upset the shareholders).
Now the risk weighted assets calculation is the key for determining the free capital available for future investments, and is consequently a key factor for the bank’s business planning.
Determining the free capital is not an easy task, as any financial investment, by definition, is a dynamic process.
Changes in the economic environment or the risk associated with financial investments produces a different result in the calculation of risk weighted assets, and consequently the bank’s capital consumption.
In my opinion, stress testing is the key. Stress testing has been very important in determining the strength of a financial system in order to support losses in portfolio values and is subsequently also a key component of efficient capital management. From a business planning perspective stress testing is the key for determining the “buffer” of free capital a bank has available for its business planning.
What do you think?
I am looking forward to read your opinions.
Kindest Regards.
Ferran.
Capital Management-Chapter II.
Dear SAP Banking Community members,
Weeks ago we talked about the main activities for efficient Capital Management.
This is going to be a very critical activity as the new Basel III regulation and the huge level of assets hold by the international Banking System is generating increasing tensions on the system as many banks are coping with poor capitalization or they’re simply undercapitalized.
On that sense, let me recommend you reading the following article on the Financial Times.
Top US banks face $100bn Basel shortfall
http://www.ft.com/cms/s/42d42de2-f593-11df-99d6-00144feab49a,dwp_uuid=f5d27f8a-a517-11dd-b4f5-000077b07658,print=yes.html
You will see that the article warns the risk of higher lending costs as the Banks can face difficulties for increasing their Capital Levels. Unfortunately it does not say anything about what the efficient determination of that price should be.
Most of Banks determine the prices of Lending (in the retail market) according to the price of the competitors, lacking of a systemic approach for calculating the lending price.
In my opinion, lending price determination (which is one of the most critical activities in Capital Management) must be determined according to a systemic model which has to take into account.
1) Funding Costs of the Loan according to its Currency and Maturity (Yield Curve). Main reference of the price of the Loan as the influence of the bank on determining that price is very limited.
2) Capital Consumption of the Loan and Free Capital of the Bank which represents the main limitation of the Bank for offering assets to the market, and consequently the main restriction for planning assets trade.
3) Market behavior.
I'd like to know the community members opinion.
What do you think?
Kindest Regards.
Ferran.
Weeks ago we talked about the main activities for efficient Capital Management.
This is going to be a very critical activity as the new Basel III regulation and the huge level of assets hold by the international Banking System is generating increasing tensions on the system as many banks are coping with poor capitalization or they’re simply undercapitalized.
On that sense, let me recommend you reading the following article on the Financial Times.
Top US banks face $100bn Basel shortfall
http://www.ft.com/cms/s/42d42de2-f593-11df-99d6-00144feab49a,dwp_uuid=f5d27f8a-a517-11dd-b4f5-000077b07658,print=yes.html
You will see that the article warns the risk of higher lending costs as the Banks can face difficulties for increasing their Capital Levels. Unfortunately it does not say anything about what the efficient determination of that price should be.
Most of Banks determine the prices of Lending (in the retail market) according to the price of the competitors, lacking of a systemic approach for calculating the lending price.
In my opinion, lending price determination (which is one of the most critical activities in Capital Management) must be determined according to a systemic model which has to take into account.
1) Funding Costs of the Loan according to its Currency and Maturity (Yield Curve). Main reference of the price of the Loan as the influence of the bank on determining that price is very limited.
2) Capital Consumption of the Loan and Free Capital of the Bank which represents the main limitation of the Bank for offering assets to the market, and consequently the main restriction for planning assets trade.
3) Market behavior.
I'd like to know the community members opinion.
What do you think?
Kindest Regards.
Ferran.
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