The financial crisis from 2008, caused by the American real estate bubble, the complicated structured finance products, the huge amount of defaulted loans, and the downfall of Lehman Brothers, impacted the world economy like few other events in the history since the Great Depression.
In an unprecedented effort the governments spent trillions of Dollars to stabilize the market and their “system-relevant” financial institutions, avoiding the total collapse. Some of the banks are now government owned; some had to agree to more control and more restrictive bonus and incentive systems for their employees. This quick response saved (more or less) the economy and also helped to win back some trust in the credit market. However, it also showed the banks that they can take on risks to an extend that is not backed up by their own equity ratio, because they know – in case of mayor problems – the governments will support and save them.
What measures are required in order to prevent this scenario from repeating itself in the future?
At the peak of the crisis, governments around the globe asked for more regulation, for more restrictive rules to better control the financial market (especially hedge funds and structured financial products), the rating agencies, and the key players. The G20 summit in 2009 agreed to more control and discussed more stringent rules but so far it is looks more like a lip service. The financial market has recovered, the stock market is showing new heights almost every day, the financial institutions are chalking up enormous profits again, and the incentive system for their management has not changed. The payed out bonus is reaching still enormous levels and is – most of the time – still not related to long term goals.
France made an effort in changing the mind-set of their mayor banks. They announced that they will only work with banks in the future for government orders who comply with the rules of more control, higher equity ratios, and long-term goals as standard for their incentive plans. While this is a step in the right direction, it can only succeed if it is adopted on a global level. Mr. Sarkozy, the president of France, therefore tried to join forces with Germany. Ms. Merkel, the chancellor of Germany, supports his efforts but also points out that it needs to be accepted by all economies to avoid disadvantages for the local economy. That is the challenge!
France and Germany are both export oriented economies. They have strong industrial industry and are not fully dependent on the financial sector. This is different for the UK. They made the decision in the 1980s to transform their whole economy, away from the industrial sector towards the service industry. They wanted to become a global player for financial services. They established London as the second largest financial market, next to Wall Street. Most of the hedge funds worldwide are located in London!
Therefore the British economy was extremely hit by the financial crisis and some of the big banks are now in the hand of the government. Yet, it did not lead to a change in the government policy. Their main concern is to lose their position in the global financial sector. Thus, Gordon Brown, prime minister of the UK, is doing his best to avoid strict rules and hardened control that could torpedo his leading role.
This may be understandable, as long as tiger states in the Middle East and Asia are eager to jump in and gain a larger market share of the financial business, but it will not solve the issue and will not prepare the global economy against a repetition of such a problematic financial situation.
Hence we can only hope that the next G20 summit held at the end of September will reach conclusions and come up with binding solutions for the global market.
Friday, September 18, 2009
Friday, September 11, 2009
Balanced Scorecard for Financial Institutions
The concept of Balanced Scorecard (BSC) is not new. It has been developed in the early ‘90s by the Robert S. Kaplan and David P. Norton. In the beginning it was more of a temporary fashion. Meanwhile it has evolved into a business standard that more and more companies adopted as their strategic management tool. That is also true for financial institutions, especially in Europe.
Every department within the company has to take – especially now in the current economic situation – an even more economic focused approach to their daily work, i.e. they need to define targets and objectives and have to specify the key indicators for managing their department profitably. And that is exactly where the balanced scorecard comes into play.
With the help of a BSC
• You will find a common bottom line; common goals for all employees
• You will identify current strengths & weaknesses within your organization and derive actions for the future
• You will make binding agreements for the future
• You will control agreements key performance indicators (KPIs) in the sense of self-control
Due to the simplicity and completeness the BSC is the right tool to model your goals and indicators.
However, a company can change their methods and organizations easily – but not always successful. If you really want to change yourselves you need to involve all employees to change their behavior and attitude. It is a longer but more successful process. The employees need to own the scorecards; they will be measured on the KPIs compared against the corresponding targets.
The traditional view of a company is backward oriented, purely focused on financial results. While they are very important and necessary to understand the performance of the company, the financial indicators are typically lagging indicators. The main achievement of a BSC is that it takes also other perspectives that are forward looking (with leading indicators) into account, making the scorecard “balanced”. The BSC also describes the interdependencies between the various KPIs, their cause & effect relationship.
The four standard perspectives according to Norton/Kaplan are
· Financial Perspective
· Customer Perspective
· Internal Processes
· Learning & Growth
For most companies these four perspectives may be sufficient. In order to keep the BSC manageable and efficient the key is to define only a very small number of truly important KPIs per perspective (typically 4 to 5 KPIs). For a financial institution this is usually too restrictive. What I have seen at my customers are 5 to 6 perspectives. In addition to the ones mentioned above, two other perspectives are more and more common in the financial industry:
· Risk Perspective
· Image
(In the manufacturing or retail industry the “supplier” perspective is often used)
The process of a BSC is clearly defined and nowadays an integral part of business intelligence. It is the combination of an easy to use BSC framework that supports the functional users in defining their perspectives, objectives, and KPIs on the one hand and sophisticated reporting / dashboard functionality to visualize the scorecard results and trends on the other hand, that gives your balanced scorecard initiative the edge. With the ability to manage and distribute your scorecards via the web to all required users the sustainability and adoption of management by balanced scorecard is much easier to achieve.
Every department within the company has to take – especially now in the current economic situation – an even more economic focused approach to their daily work, i.e. they need to define targets and objectives and have to specify the key indicators for managing their department profitably. And that is exactly where the balanced scorecard comes into play.
With the help of a BSC
• You will find a common bottom line; common goals for all employees
• You will identify current strengths & weaknesses within your organization and derive actions for the future
• You will make binding agreements for the future
• You will control agreements key performance indicators (KPIs) in the sense of self-control
Due to the simplicity and completeness the BSC is the right tool to model your goals and indicators.
However, a company can change their methods and organizations easily – but not always successful. If you really want to change yourselves you need to involve all employees to change their behavior and attitude. It is a longer but more successful process. The employees need to own the scorecards; they will be measured on the KPIs compared against the corresponding targets.
The traditional view of a company is backward oriented, purely focused on financial results. While they are very important and necessary to understand the performance of the company, the financial indicators are typically lagging indicators. The main achievement of a BSC is that it takes also other perspectives that are forward looking (with leading indicators) into account, making the scorecard “balanced”. The BSC also describes the interdependencies between the various KPIs, their cause & effect relationship.
The four standard perspectives according to Norton/Kaplan are
· Financial Perspective
· Customer Perspective
· Internal Processes
· Learning & Growth
For most companies these four perspectives may be sufficient. In order to keep the BSC manageable and efficient the key is to define only a very small number of truly important KPIs per perspective (typically 4 to 5 KPIs). For a financial institution this is usually too restrictive. What I have seen at my customers are 5 to 6 perspectives. In addition to the ones mentioned above, two other perspectives are more and more common in the financial industry:
· Risk Perspective
· Image
(In the manufacturing or retail industry the “supplier” perspective is often used)
The process of a BSC is clearly defined and nowadays an integral part of business intelligence. It is the combination of an easy to use BSC framework that supports the functional users in defining their perspectives, objectives, and KPIs on the one hand and sophisticated reporting / dashboard functionality to visualize the scorecard results and trends on the other hand, that gives your balanced scorecard initiative the edge. With the ability to manage and distribute your scorecards via the web to all required users the sustainability and adoption of management by balanced scorecard is much easier to achieve.
Thursday, September 10, 2009
New investments in secondary bonding
A bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (so called coupon) and/or to repay the principal at a later date (the maturity of the bond). In other words, a bond is a formal contract to repay borrowed money with interest at fixed intervals.
Thus, a bond is similar to a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds are often used to provide the borrower with external funds to finance long-term investments, or, in case of a government bond, to finance current expenditure.
There are two different types of bonds, bonds with fixed interest rates and those with variable interest payments.
The following bonds fall under the first category (fixed-interest):
Zero Bonds – bonds without interest payments/coupon. The issue price must therefore be much lower than the nominal value of the bond
Combined Interest Rate Loan – 2 different interest rates are assigned to the bond, a lower interest in the beginning and a higher interest rate later. That way the bond value will go up.
Straight Bonds – the holder of the bond is entitled to a fixed payment by the issuing institution (in Germany normally on a yearly basis, in the U.S. half-yearly).
The second category (variable) can have the following forms:
Floaters – variable interest rates with a minimum (floor) and a maximum (cap) usually are using a reference interest rate like the one for government bonds.
SURF – Constant Maturity Treasury Step Up Recovery Floating Rate Notes, abbreviated SURF. In contrast to normal floaters they are oriented at short-term interest rates.
Reverse Floater – like normal floaters the interest is oriented at a reference interest rate. However, in a way that the interest is going up when the reference interest rate is declining.
Participation or income bond – besides the redemption – a variable interest is payed based on revenue or dividends of the issuer.
The European market for bonds has changed in 2005 when the government liability for bonds was discontinued. After that no larger unsecured bonds were issued. Until now!
This week, four mayor financial institutions (Deutsche Bank, WestLB, Société Générale, and Lloyds) successfully issued unsecured bonds (senior notes) as well as secondary bonds with a total value of almost € 4.5 bn ($6bn)!
Secondary bonds are a mixture of stockholder’s equity and borrowed capital. In case of bankruptcy the handling of these bonds is of inferior priority, which makes them risky in the current economic circumstances. That is also true for senior notes, which are straight bonds but without the protection of government liability. It makes them interesting for investors because the increased risk is coming with higher interest payments.
According to the analysts, the issuance of unsecured bonds to such an extent, something that was impossible for banks to do in spring of 2009, shows how eager the banks are to prove their financial strength and their independency of government guarantees.
Deutsche Bank had also another reason for issuing their bond; they need money for the takeover of Sal. Oppenheim.
However, it is a sign that the banks are trying to gain trust and overcome the crisis. It has to be seen if they succeed in the long run but at least it looks like it.
Thus, a bond is similar to a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds are often used to provide the borrower with external funds to finance long-term investments, or, in case of a government bond, to finance current expenditure.
There are two different types of bonds, bonds with fixed interest rates and those with variable interest payments.
The following bonds fall under the first category (fixed-interest):
Zero Bonds – bonds without interest payments/coupon. The issue price must therefore be much lower than the nominal value of the bond
Combined Interest Rate Loan – 2 different interest rates are assigned to the bond, a lower interest in the beginning and a higher interest rate later. That way the bond value will go up.
Straight Bonds – the holder of the bond is entitled to a fixed payment by the issuing institution (in Germany normally on a yearly basis, in the U.S. half-yearly).
The second category (variable) can have the following forms:
Floaters – variable interest rates with a minimum (floor) and a maximum (cap) usually are using a reference interest rate like the one for government bonds.
SURF – Constant Maturity Treasury Step Up Recovery Floating Rate Notes, abbreviated SURF. In contrast to normal floaters they are oriented at short-term interest rates.
Reverse Floater – like normal floaters the interest is oriented at a reference interest rate. However, in a way that the interest is going up when the reference interest rate is declining.
Participation or income bond – besides the redemption – a variable interest is payed based on revenue or dividends of the issuer.
The European market for bonds has changed in 2005 when the government liability for bonds was discontinued. After that no larger unsecured bonds were issued. Until now!
This week, four mayor financial institutions (Deutsche Bank, WestLB, Société Générale, and Lloyds) successfully issued unsecured bonds (senior notes) as well as secondary bonds with a total value of almost € 4.5 bn ($6bn)!
Secondary bonds are a mixture of stockholder’s equity and borrowed capital. In case of bankruptcy the handling of these bonds is of inferior priority, which makes them risky in the current economic circumstances. That is also true for senior notes, which are straight bonds but without the protection of government liability. It makes them interesting for investors because the increased risk is coming with higher interest payments.
According to the analysts, the issuance of unsecured bonds to such an extent, something that was impossible for banks to do in spring of 2009, shows how eager the banks are to prove their financial strength and their independency of government guarantees.
Deutsche Bank had also another reason for issuing their bond; they need money for the takeover of Sal. Oppenheim.
However, it is a sign that the banks are trying to gain trust and overcome the crisis. It has to be seen if they succeed in the long run but at least it looks like it.
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