Apparently he read one of my posts and contacted me privately to talk about it. He understands that managing Risk/Accounting/Liquidity in an integrated way is a competitive advantage but he also asked me an interesting question.
“For years, we haven’t had integrated systems for Risk, Accounting and Liquidity; why do you think they’re so important now?”
My answer was the same I use to give; because the Financial Crisis has made Capital a very scarce resource and banks cannot afford to waste it.
Actually not only banks, but the whole system and I gave him an example.
3 years ago I gave an executive training for Financial Instruments in a Spanish company. They produce in Spain and export to 120 countries. When we discussed about derivatives, something interesting happened. They were aware, of course, of potential losses due to Foreign Exchange risk and tried to hedge the risk with Cross Currency Swaps.
On the other hand they didn’t estimate the Fair Value of those derivatives or calculate Hedge Adjustments (including effectiveness test). I explained them the requirements of IAS 39 and IFRS, but some of them are optional, so I gave them another example.
One of the consequences of the financial crisis is that growth is going to be very low in the next decade; we also could read something about it here.
When you’re growing at 10% with net margins of 50%, maybe you can afford to not manage efficiently all your resources, when you’re not growing and your margin is falling, you cannot.
You need to know what is the value of your assets (including cc-swaps for Forex risk hedging) and the price you pay for them, if not maybe you discover too late that you’re wasting your money.
Same example for banks, we can say that the new regulation comes with harder requirements, and it’s true, but the reality is even harder. After four years of limited growth we must understand that we’re in a new scenario. In this new scenario of limited growth, we simply cannot afford to waste capital.
That’s why Banks need Bank Analyzer now, because giving visibility to Capital consumption is the first step to manage it efficiently. With the very limited growth we’re going to see in the oncoming years, this is not just a competitive advantage, it can be the key to survive.
Obviously, understanding that we’re in a systemic crisis is not easy, in a systemic crisis the rules change and people are always reluctant to change. That’s why is hard to educate the market, but it cannot be an excuse for not doing it.
Looking forward to read your opinions.