Basel III: Necessary, but not sufficient. Have you looked at Bank Analyzer?

Dear,
Let me recommend you to read the speech “Basel III: Necessary, but not sufficient”, by the Secretary General of the Basel Committee on Banking Supervision, Mr. Wayne Byres.

http://www.bis.org/speeches/sp121106.pdf

There’re very interesting points in the speech.
- Capital and Liquidity requirements are going to be much higher for preventing future crisis.
- Regulations were insufficient to act as a constraint on the natural incentive within banks to increase leverage.
- We need to understand the demands of the environment we are presently living in.
- Shareholders will still want to avoid having excess capital sitting idle.
- Capital strength is a competitive advantage at a time of fragile markets and weak economic conditions.
- A robust set of international banking standards is critical for the future

We could argue why all these recommendations are valid today and not 10 years ago, but the key point is, as Mr. Byres points out “the demands of the environment”.

We’re in a systemic crisis and the environment has changed forever, debt levels and resources scarcity have become a huge limitation for growth.

http://www.telegraph.co.uk/finance/financialcrisis/9585027/IMF-Global-recovery-will-take-at-least-six-more-years.html

and

http://www.oecd.org/berlin/50405107.pdf

And Mr. Wayne Byres is describing how the Financial System will fulfill its function in the new economic model that will emerge from this systemic crisis.

Limited growth means limited Capital, and the logic answer for this Capital scarcity is increasing Capital Requirements. But with higher Capital requirements less Capital will be available for investing, driving the Financial System transformation from a business model based in volume to a business model based in efficient management of Capital and Liquidity. Again, Capital and Liquidity management are going to be the critical activity of the Financial System.

Efficient Capital and Liquidity management is at the foundation of the Integrated Financial and Risk Architecture of Bank Analyzer, and consequently the best answer for the requirements of the new Financial System that Mr. Byres is describing.

We’ll look at it with more detail in a future post.

Looking forward to read your opinions.

K. Regards.

Carrying, showing and using bazookas.

Dear SAP Banking community members,
Since the starting of the Financial Crisis, the term Bazooka has become very popular.

On 2008 US-Treasury secretary Hank Paulson requested a Bazooka for stabilizing the Financial Markets, preventing that the action of the short-sellers made fall the market value of a company.

Simplifying, short-sellers make fall the market value of a company by “selling” shares of the company that they don’t actually own, but they have “rented”. Later, they will buy the security at a lower price, and return it to his owner. The difference on the higher selling price than the lower buying price will make the speculator margin.

On the other hand, if the government (or any other agent) is ready to buy any security that speculators put in the market, the price of the security will not fail. If the price of the security does not fail, taking a short-position is not a good business, as the speculator will have to buy the rented security that they sold at the beginning, at a higher price (they have to return the rented security to its owner).

That’s the whole idea of carrying a bazooka, if the speculators feel that they can lose their money by taking short-positions in a security (as the government has the cash for buying the security and preventing from making fall its price), they will refrain from doing it, and the security price will not fall.

Apparently, if you have a gun you will have to use it, if you have a bazooka you will not.
http://money.cnn.com/2008/09/06/news/economy/fannie_freddie_paulson.fortune/

The same approach has been followed in the last years by governments in North-America and Europe.

http://www.washingtonpost.com/business/economy/ecb-loads-the-big-bazooka/2012/09/06/a4ff5a2a-f814-11e1-8b93-c4f4ab1c8d13_story.html

Unfortunately, there’s something wrong in the whole construction. In a world of limited capital, no agent (not even governments) can carry a bazooka (liquidity) big enough for preventing financial markets from panicking. That’s why Mr. Paulson, Germany and the IMF had finally to use the bazooka.

But carrying a bazooka is very expensive, and using it is an enormous waste of Capital. Can we afford wasting capital in a world of limited and expensive Capital?
We certainly can’t, but we’re in a systemic crisis, and stopping wasting capital is part of the exit strategy. Unfortunately systemic crisis are long and this is not going to happen tomorrow.

Looking forward to read your opinions.
K. Regards,
Ferran.

Integration, semantics and explanations.

Dear community members, 
Last week I was talking to a former client, executive of one of the first European Banks implementing Bank Analyzer-Basel II. 

The main topic of the discussion was integration in Banking Systems; he agreed that integration is key word in banking architecture for the oncoming years but he had some doubts about the capacity of SAP for becoming the leader in core banking information systems, as it has achieved leadership in many other industries (chemical, mass distribution, utilities, telecommunications, etc.) 

In his opinion banking executives request levels of “flexibility” on the Information Systems that “packaged” solution can’t offer. 

We discussed about some examples of integration scenarios in which SAP Banking has a competitive advantage. 

For instance, building Financial Instruments sub-ledger with AFI-Bank Analyzer, integrated with SAP-Banking Services and SAP-General Ledger has significant advantages over other competitors. 

1. The Source Data Layer of Bank Analyzer offers a great opportunity of reconciling Transactional and Operational Data between the Bank Analyzer and Banking Services system, which will be the basis for building the Accounting information. Even more with the services technology offered with the last Banking Services versions. 

2. The Financial Data Mart of BIW Business Content offers detailed reconciling functionalities between the sub-ledger accounting postings, coming from the Results Data Layer and the Balance Processing, and the aggregated accounting postings coming from the General Ledger. 

3. The Risk and Accounting integrated vision of the Financial Database offers reconciling functionalities between the main parameters for Solvency and Accounting calculations. 
For instance, with the IFRA we can calculate the Rating of a business segment (of a contract represented by this business segment) by following the IRB approach of Basel II, using the Bank Analyzer Historical Database, and utilize this rating for calculating the Risk Weighted Assets and Capital Requirements of the Bank, and reconciling this Rating with the Fair Value Calculation of the Loans for the IFRS-Notes. 

4. The multipurpose cash-flow generator of the Source Data Layer offers the possibility of reconciling the liquidity information of the Balance Processing-Maturity Grouping with the Liquidity Requirements for Basel III. Even more with the “accelerated” functionalities of HANA. 

But this is just the beginning, in my opinion the common semantics of the SAP components, Profit Analyzer, Business Planning and Consolidation, Business Information Warehouse will offer many more integration scenarios in the future, for Instance: 
- Reconciling planning and simulation data of Business Planning and Consolidation with Actual Data of the Balance Processing Financial Statements. 

- Reconciling the Opportunity Interest for Asset and Liability Management simulation with the Opportunity Interest calculated by the Internal Costs calculation engine of Profit Analyzer. 

And many more. 

Looking forward to read your opinions. 
Kind Regards. 
Ferran.

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

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.

May 16, 2010

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.

October 19, 2010

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.

January 20, 2011