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Last weekend World Bank delivered two interesting messages:

 

The messages seem to be independent from each other. But are they really distinct?

The subprime crisis is still responsible for a lot of actual banking business messages. Also other industry segments are not free from negative impacts. As all these messages are about the same trend: “the effect of subprime isn’t under control yet” we might ask ourselves about the regulations based on the “Basel II accord”. Last weekend the World-Bank called the banks to manage their risks better as they did in the past.

Its recommendations are completely in line with the statements of the Basel II accord, so the actual question can be cited as:

  • Is Basel II already acting? Does it deliver already value? Do we need to extend the scope of Basel II towards the regional and local acting banks?
  • Or do we need something on top of the Basel II accord (something like a Basel III or so)?

I believe there isn’t a unique answer to this question/alternative. Clear, one might argue that subprime crisis was already an integer part of the bank’s business (but not yet transparent) at the moment, where the associated implementations of Basel II regulations went. So that crisis wasn’t preventable?!?. Looking more into details, we see that Basel II doesn’t describe the execution of a specific business. Basel II describes the handling of the associated risk of that business. But that means that risk associated with banking business should be transparent and known, otherwise bank capital can’t cover that risk.

Asking for transparent business in banking industry calls for organizational workflows and methodical defined business processes. This isn’t only restricted to the description of services and interfaces, or software features and functions, it demands also for integrated workflows among people and departments, applications and platforms, and between the banks acting international, global, regional and local.

To manage this change of the banking business isn’t easy, but there isn’t an alternative to it. Looking into other industries, almost all had similar industry-related global challenges in their past. Most of them got them managed in one or another way. It can be recommended to reflect on lessons learned from other industries. The blog series “adoption of trends” targets to deliver some of these cross-industry expertises. Also SAP’s initiative “IVN for Banks”, which will become soon an independent organization “BIAN”, targets to support effectiveness of industrialization of Banking industry (see Does Industrialization require Standardization?).

The other part of the introduction of this contribution comes from customer services delivered by banks. Banks follow and support their corporate customers in their international business. Therefore there is almost no bank without one or another type of international business. Doing international business with banks is sometimes very tangible to politics of emerging and developing countries.

Over last 20 years a couple of banks extended their international network of affiliates and satellites in those countries. That banking business was not only related to international corporate customers to assist them in building commercial relationship to corporations in those countries, but also related to domestic customers (corporate, private, retail). The number of such banks isn’t small.

Well-known is the relationship between banking industry and governmental development of countries. Most of these economical initiatives are clearly win-win based. The directions and implications for the to-be-developed countries are under considerable influence by the rich countries.

Probably a major surprise for most readers of this contribution is the influence of sustainability in the context of energy consumption. To manage the provisioning of energy resources western countries target to increase the use of biomass. As agriculture space in western countries is limited the provisioning of energy out of biomass demands an import of such resources from abroad. The emerging and developing countries perceive this as a very interesting financial resource. Not only has the replacement of jungles by palm-oil plantings a heavy impact to nature and wild-life. Also the local competition between energy and food production causes dramatically changes in food prices. This in itself is very contra-productive regarding education, employment, and international collaboration. The biomass production is commented in other blogs, also hyperlinked to governmental research.

Banking industries are facing a large variety of major challenges. The export of the western business models most probably exports a next crisis into emerging and developing countries as well. An increase in performance and efficiency at western banks might unlock free financial resources to support other countries development.

The other side of the coin: some banks from these emerging countries are at the threshold of starting their business in western markets (see page 11 of the article). What type of issues they will import in our societies?

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  1. John Morrison
    Paul

    Your reference to the article from the Financial Times, is a reference to an article about the “Spring Meetings” of the IMF (the International Monetary Fund) not the World Bank and there is a significant difference. A later FT article on the Spring Meetings points out that this is the 1st time in 5 years that European and US regualtors and supervisors AND European and US Bankers have been invited to the Spring Meetings, prior to that the IMF was focussed on ensuring monetary conditions were sufficient to support the World Bank and through it International Development in the developing world.

    Effectively the IMF is now saying that this Credit Crunch problem has obfuscated that strategy just as it has left the ECB and the Fed with no control over Monetary Policy. The FSF (Financial Stability Forum, a unit of the Bank for International Settlements) has basically been providing stern warnings to the Central Banks and Supervisors to bring their Supervisory process up to scratch. An approach and logic basically commenced by the UK Treasury Select Committee after Norhtern Rock and continued via Nout Wellink, in Europe and US Senate Banking Committee after Bear Stearns.

    What making supervision more robust means is that the IMF is requiring that supervisors actually enforce Basel II Pillar 2 (the computation of economic capital) which until now the banking industry had avoided. That is what the detailed report of the FSF actually says. This can be referenced in detail.

    To do that a software vendor has to assist a bank (large or small) in architecting a solution which integrates Data Management with what are rather Advanced Predictive Modelling techniques. What the IMF via the FSF is saying now is that this can no longer be avoided if Financial Stability is to be enured and sufficient capital is to be maintained both in the Banking system and in the vehicles it uses for funding.

    The (geopolitically) important sub-point is that the work of the World Bank and national Governments cannot proceed to plan unless the banks take responsibility for Financial Stability in the manner they were asked to do by Basel II.

    Just two years ago I developed a White Paper on Basel II Pillar 2 for SAP UKI with Nick Illingworth which specified the business requirement and investigated an appropriate architecture predicated on the Bank Analyzer platform. The similarities between the FSF recommendations and the content of that WP have not been lost on a number of practitioners and academics since the IMF meetings reported this week.

    As a reference point for where to start in responding to what banking customers may initially see as new supervisory requirements I would suggest it would not be a bad place to start.

    John A Morrison

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    1. Paul Centen Post author
      Hi John,
      thanks that much about the added details regarding FSF. Can you please join your white paper in the Banking-BPX community?

      As I read your comment I remember this dispute between banks and government over last couple of years: a couple of years ago the banks kept government away from any influence at banking business; now with the crisis major banks asked the governments for support. In parallel the 2007 salaries of C-level managers were considerable.

      Not easy to understand by people from other industries and outside G7.

      Kind regards Paul

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      1. John Morrison
        Paul,

        …the Basel Committee has today announced in a Press Release that it is to support the recommendations of the FSF and issue guidance now on Strengthening the Basel II rules in 3 specific areas; 1) Structured Instruments 2) Liquidity Risk Management and 3) General Risk Management Practices. As the Press Release states, the Basel Coomittee ;

        ” will issue Pillar 2 guidance in a number of areas to help strengthen risk management and supervisory practices. These relate to the management of firm-wide risks; banks’ stress testing practices and capital planning processes; the management of off-balance sheet exposures and associated reputational risks; risk management practices relating to securitisation activities; and supervisory assessment of banks’ valuation practices.”

        Here is the Press Release URL from this morning;

        http://www.bis.org/press/p080416.htm

        The White Paper developed by SAP UKI focussed exclusively on Pillar 2 and predictated the core of supervisory requirements on economic capital, & what it refers to as “the calculus of securitisation” so it seems to have been in line with the current views of the BCBS, although the architecture abstracted there could probably be improved upon as things have developed in the past years; here is the url, if you wish you can link to it or make the SDN BPX link more formal.

        http://www.sap.com/uk/images/baselii/whitepaper.pdf

        I hope this has been helpful and thanks for the opportunity to comment.

        John A Morrison

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