tag:blogger.com,1999:blog-8180220927845574792024-02-20T03:30:43.833+01:00Financial Services ThoughtsThe purpose of this blog is to share my thoughts and ideas around business intelligence and current affairs in the financial services industry.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.comBlogger25125tag:blogger.com,1999:blog-818022092784557479.post-63631495337456755732011-11-01T03:57:00.002+01:002011-11-01T04:18:11.666+01:00Data QualityThe digital transformation in financial services is rapidly redefining how the industry does business. It is changing almost every aspect of the business model from how customers interact with their bank, to the speed with which business managers need to make decisions.<br /><br />While the core banking transactions have been digitized for many years, the current transformation is digitizing all customer relations, business rules, reference data, descriptive data and how this kind of information is delivered and consumed. <br />With the higher demand for information the data volume will grow larger and larger. Banks need to be prepared with the right strategy. This includes selecting the right business intelligence tool that is scalable, can cope with growing user and data demands (mobile and social media data will increase the data volume exponentially), is performant and flexible enough to handle quickly changing market conditions. <br /><br />Another important aspect is data quality. Analysis and reporting of information makes only sense if the data that is used for building the information, can be trusted, is accurate, and can be reconciled with the various data sources. Compliance is key!<br /><br />In order to manage and control data quality, banks all over the world are establishing data governance as part of a greater BI goverance initiative.<br /><br />The goals of data governance are obvious. Clearly defined data elements ensure higher data quality and better decision-making because the information can be trusted. It reduces operational friction and protects the needs of the stakeholders by building repeatable processes and standards. The transparency gained through these processes in conjunction with a reduction of costs and an increasing effectiveness help as well.<br /><br />The key roles of data governance are the following:<br />Data Governance Council - governing body to coordinate the effort and serve as a committee for resolving issues between the lines of business.<br />Data Owners - business that understands the data and the sources<br />Data Stewards - responsible for data/information areas, e.g. marketing, leading the effort within their area of responsibility to control and improve data quality<br />Data Custodian - IT driven role that udnerstands the technical impact of data, how it is loaded, calculated and modeled.<br /><br />The problem with such initiatives - at least from my experience - is that a lot of financial institutions believe they can do these kind of initiatives (implementing a BI Competency Center and data governance) without external help. You have to have the experience to implement this. It is a change management process that requires a very good understanding of the subject and an external view/standing. I have supported and led such engagements various times and can say that those that were following external advice and had executive sponsorship, are successful. <br />Others, that tried it themselves, usually did not achieve the level of adoption necessary.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com1tag:blogger.com,1999:blog-818022092784557479.post-13443352462257423262010-12-23T13:18:00.002+01:002010-12-23T13:22:55.550+01:00Churn Management in BankingRetail banking has changed significantly over time. When we recall the past, the relationship of banks with their customer base was different.<br /><br />When the generation of my parents opened an account with a bank, they were looking for a long-term relationship. Key factors for deciding which bank fits best were trust, the branch network, i.e. branches close to home and the size of the bank because that meant the bank had to be of great renown. Customers were loyal to their chosen bank. They usually did not close their accounts to move to a different financial institution, they sticked with their bank a whole lifetime.<br /><br />The product portfolio a bank could offer differed at that time as well. Structured finance and complex derivatives were not introduced to the market or at least not considered as a valid option for the majority of private clients. That was also partly caused by the strict distinction between retail and investment banking in most countries.<br /><br />The internet as well as the globalization and deregulation of the financial sector changed that situation fundamentally. The ability to collect immense volumes of information, enabling the individual customer to compare different financial products, analyze benchmarks without having to contact a financial councilor, doing online banking without talking to a bank clerk, revolutionized the banking business. Customers are not longer dependent on their bank; the relationship strings are loose and can lead to higher churn rates.<br /><br />Generally, customers are satisfied when purchased products or services agreed upon fulfill their expectations. Nowadays, that does not necessarily lead to the conclusion of customer retention. That is one of the biggest challenges of the financial industry, especially of online banks.<br /><br />According to a recent study of the (German) Gallup-Institute in autumn 2009, 65% of retail banking customers do not feel bound to their bank, only 14% are loyal and 21% consider themselves as bound to their financial institute but not loyal. These numbers are even worse for direct banks, since their customers are only interested in efficient service, low fees, fast transactions and the independency of opening hours. They normally do not need guidance from an advisor. This independence makes those customers volatile. As soon as another bank comes up with an allegedly attractive offer or lower fees, they consider moving away from their current bank.<br /><br />It is therefore pretty tough for financial institutions to keep their profitable customers. That is the reason why banks are developing <strong>Churn Management </strong>or <strong>Customer Loyalty Systems</strong> respectively.<br /><br />An example for such an initiative can be found at the German DAB (specialized on online banking). They started by analyzing the importance of customer loyalty on behalf of their executive board. Based on the results they determined alternatives for action, not just to identify likely churners but also to trigger loyalty campaigns.<br /><br />In that context it is very important to achieve a common understanding of what loyalty means to the organization and how a bank can determine early in the process if a customer has a tendency of closing his accounts with the bank. Examples of wantaway customer scenarios are:<br /><br />• Customers that alienate their cash and stocks completely and do not perform any transaction, at least for a segment-specific timeframe.<br />• Customers that reduce trading by a specified minimum percentage per defined period.<br />• Customers that reduce – with their own transactions – their total asset value more than a specified minimum amount. <br />• Customers that went inactive but were categorized in an active customer segment before<br /><br />Once that understanding of a likely churner is established, the banks can analyze their customer information in their data warehouses, using business intelligence, do identify the risk of losing profitable customers. Each bank has usually thousands of different parameters that could play a role in that analysis.<br />Based on the historical information of each customer, an individual trend analysis can be established to show the development of each customer, his lifetime value. The marketing and sales team, who need to have a clear view of potential churn-threads in order to react quickly, can get a monthly dashboard showing the key performance indicators of each customer, like<br /><br />• Customer Value (past performance and asset value)<br />• Performance Rating (based on thresholds and benchmarks)<br />• Risk of Churn (on a scale of 0 – 100)<br />• Customer Portfolio Development (trend, total assets, variance analysis, product split)<br /><br />Prepared with this information in an easy consumable way, e.g. in dashboards that show the information in graphs, using traffic light indicators and other widgets to demonstrate the trends in a flexible manner (and maybe a more detailed overview of the customers’ portfolio), the sales department can trigger actions to retain their profitable customer base. Marketing can package specific incentives for their most valuable customers, knowing that simple fee reduction would not solve the underlying thread. The call centers will get a better feel for the importance of their customers and can prioritize the incoming requests. Last but not least, the management will get a tool that allows them to make better informed decisions regarding product strategy, customer relations and other strategic investments.<br /><br />Coming back to the example of the DAB in Germany, they implemented such a loyalty system and are already seeing the positive impact such an analysis tool and management system has on their business and their customers. They expect to retain up to 30% of their customers with a high churn risk through to proper micro-campaigns based on the customer analysis provided.<br /><br />Retaining 30% of your profitable customers that you normally would lose is quite an achievement and key to the success of a financial institution. You can make the math!R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com1tag:blogger.com,1999:blog-818022092784557479.post-6253690664483171522010-09-10T12:35:00.001+02:002010-09-10T12:37:49.167+02:00BASEL III – What does it mean?The purpose of Basel II (recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision), which was initially published in June 2004, was to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face.<br /><br />In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability<br /><br />Even though the European banks and most banks in the global markets have implemented the Basel II rules, analyzed the risk exposure and the value at risk, the financial crisis revealed that the capitalization and liquidity of many banks is not enough. Financial institutions like the Hypo Real Estate in Germany, RBS in UK or Fannie Mae in the US had to be saved by the governments because their reserves were not sufficient to cover for the credit losses and massive depreciations on toxic assets.<br /><br />The main goal of the Basel committee is to prevent the next financial crisis. Hence the members of the committee came to an understanding (on September 7, 2010) to keep a tighter rein on the banks. Those new regulations will constitute the third accord of the Basel Committee on Banking Supervision, also known as BASEL III.<br /><br /><p>While the chairmen of the central banks and financial supervision organizations of 27 countries will have the final saying (they will meet on Sunday, September 12), the core elements of the new regulations are known:</p><ul><li>Minimum quotas for the Core-Tier-1 capital of publicly traded corporations which – according to the plans – in the future, will only consist of ordinary shares and revenue reserves. </li><li>Special rules apply for savings, cooperative, and regional banks, which are not publicly traded corporations. Under certain criteria’s (e.g. profit-and-loss distribution) certificates and silent participations can be added to the Core-Tier-1.</li><li>The required core capital ratio is expected to be 6%.</li><li>In addition, BASEL III will probably dictate the installation of two capital buffers for financial distress, each in the amount of 2%. The Basel Committee suggests a leverage ratio of 3%. This means the balance sheet total can only be 33 times larger than the core capital, i.e. the raising capital is limited.</li></ul><p>What does that mean for the financial institutions and the economy?<br />The banks have to hold out a capital reserve of 10% and can only raise limited amounts of capital in the market. To give you an example: for the top 10 German banks alone this means an increased demand of more than $ 130 billion. In addition, if the banks in Germany want to do their business to the current extend in the future, they need to increase their capital base considerably. If that does not work out, the granting of credits in Germany could decline dramatically, probably in the range of $ 1300 billion (according to the banking association). Therefore the Basel Committee wants to install the deficit limit only for a test. It will not become binding before 2018. </p><p>In any way, it will have a negative impact on the economic growth in Europe, the USA and other markets. The banks have to redesign/enhance their risk models and analyze their equity ratios and liquidity risk more closely.</p>R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-42106792400842846732010-08-04T16:41:00.001+02:002010-08-04T16:44:01.736+02:00CoCo Bonds<strong>Contingent convertible (CoCo) bonds</strong> are a new way for banks to raise capital. Traditionally, banks – like other businesses – had two sources of capital: debt (e.g. money from issuing bonds), which must be paid back to investors, and equity (e.g. money from issuing shares), which is permanent. In simple terms, this creates a conflict between the bank’s owners (who tend to prefer new finance to be raised from debt, to avoid having their own share of ownership reduced) and regulators (who expect banks to hold sufficient equity capital to cope with financial shocks). CoCo bonds are a kind of hybrid between debt and equity: they are issued as debt but convert automatically into equity when a bank gets into trouble.<br /><br />What makes CoCo bonds so attractive?<br /><br />Regulators and bankers are keen to avoid a repeat of the recent financial crisis, when existing forms of hybrid finance were shown to have serious failings. An inherent problem within banking finance is the risk of panic: when a bank needs to convert hybrid debt into equity, it sends a clear signal to investors that the bank is in trouble. These investors are then tempted to withdraw their investments, making the initial problem much worse. CoCo bonds are emerging as the most concrete new idea for solving these inherent problems, but many issues remain to be solved, not least how to define the trigger that causes the bonds to convert automatically. <br /><br />CoCo bonds are debt instruments with the special feature that they will convert mandatorily in ordinary shares or similar instruments of the relevant issuer, mostly banks, when one or more triggers are met. Such a trigger could be for example reaching a certain threshold in the required capital ratio of the bank. In this aspect capital insurance bonds resemble more catastrophe bonds than convertible bonds. Hence they are also called <strong>Capital Insurance Bonds</strong>. However, as an emerging asset class there are still no clear market standards visible.<br /><br />Holders of borrowed capital become regular stock holders, which increases the capital base of the institution. The investors are getting compensated for the risk of becoming a share holder at an unfavorable time through increased interest rates (in comparison to regular bonds).<br /><br />The first CoCo bonds were issued by the partly government-owned Lloyds Banking Group in November 2009. If the capital ratio of Lloyds falls beneath 5%, the bonds (worth 10 bn Euro) will be swapped into shares. The Dutch Rabobank followed this example with the issuance of CoCo bonds in February 2010.<br /><br />There is currently no further CoCo bonds issuance because the rating agencies are lacking confidence to evaluate the CoCo bonds due to the equity like character of the bonds. While the British Financial Services Authority (FSA) accepted those bonds as equity, the official announcement of the BASEL committee is still pending. The BASEL committee wants to declare in September 2010 if and in which form those CoCo bonds can be attributed to the equity of the financial institution. If that will be the case those bonds will most likely become extremely popular.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-16598430775226844612010-05-05T18:26:00.001+02:002010-05-05T18:29:21.118+02:00iPhones will change the game for mobile bankingGermany is a tough market. On the one hand, Germans consider themselves as innovative and technology driven. The internet and mobile phone technology is commonly used in the population.<br /><br />On the other hand, internet banking and online transactions are primarily used by the younger generation and are not generally accepted across all generations. The percentage of internet banking users in Germany may be higher than some of their neighbors (e.g. Belgium and Poland), but compared to countries like the UK, the USA or South Korea the customer behavior is still pretty conservative.<br /><br />This may change with the iPhone.<br /><br />71% of the Germans who have internet access also possess a web-enabled mobile phone. This is an increase of 14% in comparison with last year. The main driver behind this development is the iPhone. Even though a standard for representing online information already existed for about 10 years it was considered slow, inflexible, not user friendly, and costly. The market launch of the iPhone in 2007 brought relief by introducing the first intuitive usable mobile browser. In addition, the other barriers were removed, i.e. the telephone companies increased the data throughput significantly and developed affordable call charge models.<br /><br />The introduction of the iPhone came along with a variety of applications in the iTunes store to enhance the functionality. Other vendors, like Google and Nokia, followed lately with similar smart phone concepts, broadening the spectrum. According to an article I read recently every fifth sold mobile phone in Germany is already a smart phone.<br /><br />Anyhow, so far the mobile banking business did not capitalize on this development. In 2009 – referring to results of a recent survey from Steria Mummert Consulting – only 11% of the mobile internet users handled their banking transactions via mobile phones. The demand, however, is much higher. One out of three would like to use this kind of service but only a few financial institutions can fulfill their needs.<br /><br />That does not mean that the financial services organizations will not jump on the bandwagon. The survey (conducted with banking executives) “Branchenkompass Kreditinstitute 2009” from Steria Mummert indicates that 42% of all German banks plan to invest in mobile banking (M-Banking) in the near future. 15% of the banks already provide some sort of mobile application but those applications are still very simple. They provide customers with guidance to the nearest branch office or a dictionary of contact persons.<br /><br />While these applications may be useful, they do not use the potential of mobile intelligence. Why should a bank point their customers to the next branch when instead they can manage their transactions online? There are many M-Banking applications economically reasonable which can simplify the life of customers but also give banks an ideal vehicle to interact with them.<br /><br />· Monthly Financial Statement (for free). The customer can check the settlement of his accounts<br />· Portfolio Analysis (maybe for free or for a fee). Customers will get a daily/weekly view of their investment portfolios<br />· Multi-Banking (chargeable offering). Management of multiple accounts of the customer,<br />including those outside of his house bank. This functionality could be very attractive to customers with multiple accounts in different banks, especially with those that do not offer smart phone apps yet. The only requirement: each bank need to support the HBCI-protocol for online banking.<br />· Marketing Campaigns. The bank can include actual product information as part of new applications, as long as the customer does not suppress this feature. This will not only improve customer loyalty but can also serve as sales vehicle.<br /><br />These applications are already available in the market. Other M-Banking features that customers could benefit from and are accustomed to using online banking, have not reached market maturity yet, e.g.<br /><br />· Management of Standing Orders<br />· Portfolio Management<br />· Personalized Stock Information Services<br />· Live News Ticker<br /><br />The disposability of these applications will enable customers to react quicker and to use otherwise unproductive time more efficiently. By offering these apps the bank will generate added value for their customer base and will benefit through increased customer satisfaction and retention.<br /><br />The developments in the mobile phone industry will continue. While the various applications mentioned above can be realized with current technology, the next level of smart phone innovations is already in the making, mobile phones as means of cashless payment.<br /><br />The next generation of smart phones will – according to industry observers – contain a Radio Frequency Identification chip, short: RFID-chip. This technology allows a wireless data transmission on short distances, thus making the mobile phone a functional currency.<br />By now this technology is only implemented in a few mobile phones and rarely used. In contrast, being part of an iPhone and using the hype around it could mean a breakthrough for the technology. The debut of the next iPhone generation is expected in summer 2010. If the prevalence rate of the next iPhone is similar to prior generations or the current run on the iPad, banks have to be quick, reacting to these new market conditions in order to keep their customer base.<br /><br />Because one thing is clear, not only banks and credit card companies target this market. New players will arise with attractive product packages, trying to get a piece of the pie. It is therefore mandatory for the financial services industry to be prepared if they do not want to lose their customers or at least a capital drain.<br /><br />The main counter-argument of those banks not planning to invest yet in M-Banking: it is a low margin business. The usage of internet banking has a higher net value added (due to the required development effort for M-Banking) and even that technology is not widely used by the customers – as mentioned earlier.<br /><br />However, business intelligence software like MicroStrategy already incorporates mobile functionality. In addition, more and more effort will be spend on enhancing the smart phone capabilities and providing banks with the right toolset for their business. As a consequence the development costs for the banks can be limited and furthermore, banks will be able to sell these new offerings to their customers (smart phone users are used to pay for qualitative apps), hence reducing their investment and maybe even build new attractive revenue streams.<br /><br />Mobile banking services will be one of the keys to success of financial institutions and their customer relations in the future. Addressing customer needs is therefore one of the main objectives of mobile banking applications. That is not to say that there is no use for internal apps as well, the typical audience is just smaller. Here are some examples of possible mobile apps in financial services:<br /><br />· Executive Dashboards. All relevant KPIs for the management available at a glance.<br />· 360 Degree Customer View. All relevant information of a customer (including product suggestions) directly send to the mobile device of the customer service field representative<br />· Wealth Management Dashboards. Actual information to manage the portfolio of wealthy customers.<br />· Risk Dashboard. The most important risk indicators (for the C-level management) to run the business.<br />· Internal News Updates. Possibility to communicate company news to the workforce.<br /><br />To sum up, I can say that mobile banking will become more and more important to the financial services organizations, externally to communicate and interact with their customers, internally as a reporting vehicle to their management and employees. Even though I used Germany as an example these deliberations can be applied to the financial services industry as a whole.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-81754201096948501182010-05-03T16:34:00.001+02:002010-05-03T16:36:23.110+02:00Government Bonds – The inherent risks in the balance sheetsEuropean banks and insurance companies hold to a great extend consols (government bonds) from shaky candidates like Portugal, Ireland, Italy, Greece, and Spain. Since these five countries have a history of uncertainty, they are known in the financial market as “Piigs”.<br /><br />The rate of these bonds as well as their solvency decreased significantly especially due to the downgrade of Greece (and later of Portugal and Spain) by the rating agencies and the following disturbances of the markets. According to the newspapers, a 10-years Greece bond of Greece which was noted in March 2010 with almost its denomination value, can at the end of April only find a purchaser with 82% of its repayment values.<br /><br />Banks that were heavily involved in the government financing business own lots of these consols, like the now government owned Hypo Real Estate in Germany with 39 billion Euro. However, that does not mean that it has an immediate impact on the balance sheets of the banks (i.e. exposure of their equity ratio). It depends on a complex set of rules.<br /><br />Is the bond part of the trading portfolio of the bank (those consols that are supposed to be traded on a short-term basis) then the volatility of the stock price will have an immediate effect on the profit and loss statement.<br /><br />Financial services organizations also need to have a foundation of liquid assets. Since government bonds are usually considered to be sound investments – even from the PIIGS countries – they can often be found in the liquidity reserve to serve short-term payment obligations of the organization. The problem here is the same as with the trading portfolio, changes directly impact the P/L.<br /><br />As a counter measure, to avoid the effect and to reduce the risk of negative impacts on the balance sheet, banks often moved these consols positions into different portfolios, as asset investments. With this trick the investments are labeled as long-term positions with the consequence that the bank can wait with adjustments of their financial statement till the government of the bond is unable to pay the interest or – as a measure of debt refunding – is reducing the repayment value of its debts (called haircut). But that scenario is not likely as the countries of the European Union are willing to help Greece with around 110 Billion Euro of instant loans.<br /><br />The solvability and Basel II rules demand from financial institutions to hedge their security portfolio with equity in their balance sheet. If the securities rating are going from bad to worse, more and more equity is required as a safeguard. However, government bonds underlie special regulations. As long as the European banks follow the standard principles of capital adequacy, i.e. accessing only external ratings, they do not have to allocate any equity for consols coming from countries of the European Union!<br /><br />While bonds issued by a company with the same rating as Greece at the moment would result in a requirement to reserve 8% equity on the balance sheet of the holding financial institution, none of this applies to the Greek bonds, under the premises of using standard external ratings. Larger banks, though, do not fully rely on external ratings; they consult in addition their own rating models and hence have to comply with different rules.<br /><br />Some institutions have therefore most likely added more equity as a risk provisioning due to the lowering creditworthiness of Greece. Most others however, did not follow that path and appeal to the fact that companies that follow their own rating guidance in general can still assess parts of their portfolio according to external ratings. Allianz, the German insurance heavy-weight for example, has heavily invested in Piigs-bonds but still does not see a reason for depreciation, since none of them has defaulted yet.<br /><br />What does that mean for the industry?<br /><br />The European governments are trying to get voluntary support from the private banks to take on parts of the credit burden. The financial institutions have a lot of risk hidden in their balance sheets that is not hedged by equity reserves. That is why they may be willing to help the EU to some extent, but I doubt that they will accept taking on a large portion of the additional credit risk, they will leave that to the politicians.<br /><br />Even though most financial services and insurance companies used the accounting standards to their advantage, avoiding additional equity reserves as risk mitigation for the unsafe consols, they are aware of the risk involved. This leads to additional reporting needs:<br /><br />· Companies always differentiate between external and internal reporting to cater to the various stakeholders’ needs. The authorities are interested in a public view of the business according to the accounting standards, while the internal view gives the management a different overview based on other criteria.<br /><br />· The principles for external reporting follow tax law and other regulations, like Basel II compliance. External reporting is therefore strict and formalized. The accounting tricks mentioned above are reflected in the external reporting.<br /><br />· Internal reporting on the other hand is more flexible. Here the management can use the reporting for strategic purposes, for different views of the business (e.g. using an organizational structure to-be) and is not limited in the usage by regulations. The added risk of government bonds is taken into account and separately shown in the balance sheet. In addition, it is very likely that the executives want to see specific dashboards qualifying the impact of government bonds in terms of value at risk.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com1tag:blogger.com,1999:blog-818022092784557479.post-47224547648228879392010-02-16T08:37:00.005+01:002010-02-16T08:52:18.400+01:00Interactive Bubble Charts – a technical gimmick or an important reporting feature?The market for business intelligence differentiates 5 styles of BI:<br />· Reporting<br />· Advanced Analysis & Ad hoc Reporting<br />· OLAP Analysis<br />· Scorecards & Dashboards<br />· Alerting & Proactive notification<br />While reporting, the classic discipline of BI, i.e. predefined operational reports with perfect layouts and ideal for printing, is widely used in financial services and also the ad hoc analysis, advanced analysis (including data mining) and OLAP reporting is getting more and more popular, dashboards still represent a relatively new discipline in financial services. This has partly to do with the fondness for Excel in the various departments, but is also contributed to the fact that users have not fully grasped the possibilities a dashboard can provide, which a standard report is not capable of.<br /><div><br /><div>However, the demand for dashboards is significantly picking up lately!<br /></div><div>What are the reasons for this change in perception?<br /></div><div>The idea of dashboards followed the study of decision support systems in the 1970s. With the propagation of the web in the late 1990s, the dashboards as we know them today began appearing.<br /></div><div>In management information systems, a dashboard is an executive information system user interface that is designed to be easy to read. Dashboards may be laid out to track the flows inherent in the business processes that they monitor. Graphically, users may see the high-level processes and then drill down into lower level data. This level of detail is often buried deep within the corporate enterprise and otherwise unavailable to the senior executives. Dashboards are therefore business driven. Dashboards give a visual representation of performance measures. They give the ability to make more informed decisions based on collected business intelligence and align strategies and organizational goals (e.g. to visualize balanced scorecards).<br />These are all important factors and business users saw the value dashboards could add and really liked them. Nevertheless they often hesitated to implement them and stick to their two dimensional standard reports.<br /></div><div>The financial crisis however made financial institutions rethink their current reporting strategy. Business as usual was just not good enough anymore. In the past the organizations invested heavily in risky financial instruments, always looking for the biggest return, regardless the inherent risk. Now, with the dramatic changes in the economy, financial services institutions are starting to think more strategically. They want to be cost efficient, want to streamline their business processes and are therefore willing to invest in best practices in order to be well positioned for the future.<br /></div><div>That also includes dashboards because they come not only with the advantages mentioned above; they offer an additional important benefit: they save time over running multiple reports!</div><div><br />A standard report / grid can provide information in a two dimensional fashion. With OLAP reporting you have the ability to drill down by multiple dimensions but you can still see only a limit amount of information in one screen. With dashboards, this limitation is not longer a problem.<br /></div><div>Let us assume a bank wants to get insight into their business segment performance. The key metrics they want to see over time for all their segments are:<br />· Operating Margin<br />· Return on Equity (ROE)<br />· Net Income<br />In a two-dimensional standard report we would build this as a grid, with periods in the column and the KPIs in the rows. We would then build a filter into this report so that we can select a segment. A comparison of all segments at the same time is not easily possible. We can also not easily identify trends over time, especially if we have more data (multiple segments with lots of periods) to analyze.<br /></div><div>Of course we can improve this report by adding sums, variances, and even traffic lights to indicate trends but it is still not intuitive and takes time to consume.</div><br /><div><img id="BLOGGER_PHOTO_ID_5438744039138244594" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 54px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZVlbiuc6eq9Ake_kcaWcweeMealcHi0y9qAfR1Kqt9uZVys6JO0tMb4_lr1TwYTLaqhUgu548fX1Xcnhz8AW6QhEKmIJhg-TPV2GammeRHWOourOeuJf4BScjZir7fOdT0PlUGKGSTXs/s320/table1.PNG" border="0" /> </div><div>Another option would be to build an OLAP report where the segment is a dimension that we can show on the report. With nesting, i.e. the visualization of multiple dimensions in the rows, we could get more information on the report. But it would be difficult for the business to digest the information and comparisons between segments over time.<br /></div><div></div><img id="BLOGGER_PHOTO_ID_5438744385361881490" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 106px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhIxSty2eIQZjFdF79GvZxHNwa7y9o7qLQ7qLsSZMlI6XNhmxMl8QIEax29ZZjWy_YrDqZQBCbEeeGs1O3u_Yf4ekNT0m2AEV4Ga2MABaGDh25HKpjNmSN4LR1_yM-IIAVPtzV3HJgpGoE/s320/table2.PNG" border="0" /> Now, if we build the same scenario as an interactive bubble chart into a dashboard, we can easily incorporate all the desired functional at once.<br /></div><div>Each bubble represents a different segment (differentiated by its color); its size outlines the net margin of the segment. The position of the bubble in the graph is determined by the x-axis (ROE in %) and the operating margin (in %) on the y-axis. This is easy to understand but it gets even better. With the interactivity of the bubble chart you can see how the size and position of each bubble is changing over time.<br /><br /><div></div><img id="BLOGGER_PHOTO_ID_5438745115236565778" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 247px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGSDvtuaJ4IlcW2tQzvCSpq8fWtiTRB8cBS9_-2mZnKT070TBdhX1dCVv0COF5LGVZU2RuYd7L9ofInvZiKjDwiaREYOsSgEc4lJz0ZyFqFE7wWmbGeFcOao5WqcubP_xTk4w_CpUwJGc/s320/Bank_Performance_Summary.PNG" border="0" /><br /><div></div><div></div><div></div><div>This resonates very well with the business users. They save a lot of time they had to spend on finding the information and can instead concentrate on their real job, analyzing the information and making informed decisions based on the findings.<br /></div><br /><div>Now, that the business has seen the potential and the wide range of use cases for dashboards they are asking for more. They would like to generate dashboards that incorporate all their relevant information they need to perform their daily business. With well defined dashboards that are concentrating on the information that is really relevant, the answer is simple.<br /></div><br /><div>MicroStrategy for example offers for this purpose a dashboard book, i.e. a set of dashboards that are contained in one file, available for distribution (via email or on a mobile devise). The business already loves it.</div></div>R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-16996332014098571592010-02-16T08:34:00.001+01:002010-02-16T08:36:42.446+01:00Release Management in BankingOrganizations buy software to help them solve their business problems. The software comes usually packaged with a maintenance contract which allows the companies to get support when needed and to update to the latest releases of the software.<br /><br />In general companies are trying to be up to date with the software releases as much as possible in order to utilize new functionality and to get the latest bug fixes. This is especially true for business intelligence software that gives the organization a competitive advantage by delivering invaluable insight into the business. Those companies are therefore pretty open when it comes to install new service packs, hot fixes or patches.<br /><br />This is different for most of the larger financial services organizations.<br /><br />I am not talking about mayor releases here, i.e. a totally new version with new functionality, enhancements and maybe a better GUI (Graphical User interface). Those migrations usually need very extensive preparation time but for most software companies these mayor releases only occur every 2-3 years.<br /><br />Larger banks require even for minor releases or service packs a long preparation phase and intensive testing before an upgrade can be implemented. This has to do with the restrict risk & compliance rules, the sensitivity of the data, the business model of financial institutions and with the fact that banks have often outsourced the IT service handling the migration.<br /><br />They are installing the software typically in a sandbox environment; test the software thoroughly until the results for all their test scenarios are satisfactory and then they plan the technical steps for the upgrade. Part of the testing on the IT side includes carry out random installations in their machines and test for no compatibility issues with other standard applications at the bank.<br />This process usually takes 3-4 months.<br /><br />The duration of the implementation – after the completion of the testing and planning mentioned before – is then dependent on the changes to the software and the internal process. The usual setup includes a development, a test and a production environment and proper procedures to move between those environments. As a rule of thumb such an implementation takes another 2 months. On average a migration to new software versions takes therefore in total ~ 6 months.<br /><br />While there is software in the market that requires a much longer migration cycle, this is a pretty good estimate for most BI software migrations in financial services organizations.<br />However, some financial services institutions exceed this time by far and are looking for tools and external support to streamline their processes.<br /><br />The procedures are especially inefficient when it comes to hotfixes and patches that are supposed to solve immediate issues. In case of a not foreseeable real issue that could be a threat for the daily business even banks are very open to implement patches quickly. This patch still needs to follow certain test procedures in the sandbox but this is much faster (can be done in two days till a week). Nevertheless, the companies try to avoid this as much as possible due to the extensive test scripts.<br /><br />The required effort also depends on who owns the responsibility for the BI resources. As a rule of thumb, if the BI department is the owner of all the resources, it is usually less problematic and the processes are more promptly. Otherwise you could run into delays since you do not have all the resources at your disposal.<br /><br />In summary, release management is becoming a very important topic for the financial services industry as it ties up budget, resources for a longer time period. As a consequence, those software vendors that offer a single, integrated tool based on a unified platform architecture – usually those that remained independent without the hassle of product integration issues due to newly acquired software – with a simple migration path for their customer base, will have a huge competitive advantage in the market space.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-87035765086395270252010-01-02T20:05:00.001+01:002010-01-02T20:07:30.531+01:00Microcredit – An Opportunity for Financial Institutions<strong>Microcredit</strong> is an extension of very small loans (microloans) to those in poverty designed to spur entrepreneurship. These individuals lack collateral, i.e. (in lending agreements) a borrower’s pledge of specific property to a lender, to secure repayment of a loan. Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor. The financial innovation of microcredit has originated – at least that is the general consensus – with the <strong><em>Grameen Bank</em></strong> in Bangladesh. In that country, it has successfully enabled extremely impoverished people to engage in self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty.<br /><br />The system of the Grameen Bank is based on the idea that the poor have skills that are under-utilized. A group-based credit approach is applied which utilizes the peer-pressure within the group to ensure the borrowers follow through and use caution in conducting their financial affairs with strict discipline, ensuring repayment eventually and allowing the borrowers to develop good credit standing. The bank also accepts deposits, provides other services, and runs several development-oriented businesses including fabric, telephone and energy companies. Another distinctive feature of the bank's credit program is that a significant majority of its borrowers are women.<br /><br />Professor Muhammad Yunus, who launched a research project to examine the possibility of designing a credit delivery system targeted to the rural poor, can be seen as the founder of the Grameen Bank.<br /><br />Due to the success of microcredit, many in the traditional banking industry have begun to realize that these microcredit borrowers should more correctly be categorized as pre-bankable; thus, microcredit is increasingly gaining credibility in the financial services sector. Many large finance organizations are now considering microcredit projects as a source of future growth, which is interesting, given that almost everyone in larger development organizations speculated on the likelihood of failure of microcredit when it was begun.<br /><br />The United Nations declared 2005 the International Year of Microcredit and in 2006 received Professor Muhammad Yunus – in recognition of his efforts – jointly with the then independent Grameen Bank organization the Nobel Piece Price.<br /><br />In the course of the financial crisis many small companies and entrepreneurs around the globe had problems to get access to a loan. This is especially true in Spain where the real estate market collapsed. <strong><em>La Caixa</em></strong>, the biggest savings bank in Spain, who founded in 2007 with <strong><em>Microbank</em></strong> the first European bank, specialized on microcredit, is very well positioned to help those in need of a small credit. The bank also proved that it can be a very profitable business. In their first two years of existence they financed 48813 projects with a volume of 331.8 million Euro (~ 480 million USD). Of course the financial crisis caused reluctance in new investments and company foundations. Nevertheless, the business of the bank is steadily growing. Microbank, also called “the social bank of La Caixa” generated a net income of 5.2 million Euro (~ 7.5 million USD). Half of the money went to families to overcome their current financial shortages, the other half was put into company projects.<br /><br />According to a study by Esade, a Spanish management firm, 84% of the company projects financed by microcredit from the Microbank proceed successful. Furthermore, every fifth company hired 3 or more additional heads for their workforce.<br /><br />I believe that – as a direct consequence of these successes –financial institutions and governments will become more and more interested in this concept to open up new revenue generating possibilities and respectively overcome problems with high unemployment. Needless to say that this will go hand in hand with new process and reporting requirements for the microcredit business.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com1tag:blogger.com,1999:blog-818022092784557479.post-36203243333641422042009-11-12T15:23:00.001+01:002009-11-12T15:26:00.122+01:00SEPA – New regulations for financial transactionsSince the beginning of November 2009 new regulations for banking transactions in Europe are in place – as a consequence of SEPA efforts.<br /><br />What is SEPA? As the European Payments Council states, the <strong>Single Euro Payments Area</strong> or <strong>SEPA</strong> will be “the area where citizens, companies and other economic participants make and receive payments in euro, whether between or within national boundaries, under the same basic conditions, rights and obligations. In the long-term, the uniform SEPA payment instruments are expected to replace national euro payment systems now being operated in Europe“.<br /><br />SEPA currently consists of the 27 EU Member States, Iceland, Liechtenstein, Monaco, Norway and Switzerland. SEPA is an EU-wide policy-maker-driven integration initiative in the area of payments designed to achieve the completion of the EU internal market and monetary union. Following the introduction of euro notes and coins in 2002, the political drivers of the SEPA initiative - EU governments, the European Commission and the European Central Bank - focused on harmonizing the euro payments market. Integrating the multitude of national payment systems existing today is a natural step towards making the euro a truly single and fully functioning currency. SEPA will become a reality when a critical mass of euro payments has migrated from legacy payment instruments to the new SEPA payment instruments.<br /><br />The main benefits expected are the creation of conditions for enhanced competition in providing payment services as well as more efficient payment systems through harmonization. Once the SEPA is established it will be possible to exchange euro payments between any accounts in SEPA as easily as it is possible today only within national borders. Common standards, faster settlement and simplified processing will improve cash flow, reduce costs and facilitate the access to new markets. Moreover, users will benefit from the development of innovative products offered by payment sector suppliers.<br /><br />According to a recent study conducted by CapGemini Consulting at the request of the European Commission, the replacement of existing national payments systems by SEPA holds a market potential of up to €123 billion in benefits, cumulative over six years and benefitting the users of payments services.<br /><br />While this potential is extremely interesting and important to financial institutions, it also means that the banking processes, reporting requirements etc. need to be adjusted and the terms and conditions for the customers are changing.<br /><br /><p>The personal risk of consumers when making a bank transfer or when losing their debit card has heightened. The main changes for customers are:</p><ul><li>From now on a bank transfer becomes irrevocable on receipt by the bank, i.e. if the customer makes a mistake filling out the transfer of payment, he cannot reclaim the transfer himself, even if the bank has not executed the transfer yet.</li><li>Furthermore, banks are not longer obliged to verify that the name of the recipient of the transfer is in accordance with the bank account number. In the past – at least in Germany – courts did not consider the account number as sufficient.</li><li>It is now the responsibility of the customer himself to get his wrongly wired money back, not longer a task of the bank.</li><li>Another new rule is related to the “EC-card” or debit card. Customers have to pay up to €150 when their debit card was used abusively due to the fact that it got lost. The liability of the customer starts with losing the card and ends with the bank inactivating the card. This is a shift in accountability. In the past the consumers were only liable when they acted carelessly.</li><li>With the implementation of the new EU-rules a debit advice can be made European wide, i.e. across countries, not just within the country of the customer.</li></ul><p>SEPA forces financial institutions to implement the new European instruments and processes and to tie their payment transactions with the electronic mass transaction systems of the central banks, e.g. SWIFTNet (the system of the German Central Bank). In addition, a more detailed customer administration and engagement with the customer is needed; adjustments to the master data as well as a more sophisticated debitor analysis are also required.<br /></p><p>In order to make these changes for the financial institutions and their customer base as smoothly and transparent as possible business intelligence plays an integral part.<br /></p><p>For the customers it is important to mitigate their risk by getting all relevant information about the transactions quickly at a glance, e.g. showing the name of the recipient and the account number. Exception reports can also help identifying suspicious transactions.<br /></p><p>For the banks the process is now more standardized, which means the reporting requirements to the authorities are also more restrict. In addition, they need to anticipate the possible issues with customers and their transactions and should prepare for it with the right level of detailed reporting. </p>R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-68383394443799207612009-10-13T17:49:00.002+02:002009-10-13T17:53:21.997+02:00CRM or CMR?Is the change from the traditional and well known Customer Relationship Management (CRM) towards Customer Managed Relationships just a nice idea or really an interesting concept for the future? Customer orientation and improvements of the value to the customer is something all financial services institutions have on their radar but the realization of these goals is not simple. In any case, the customer becomes more and more the key factor for the success of a company.<br />The market condition has changed significantly with the internet. The possibilities are immense and the transparency of the market increased a lot. While it was difficult in the past to compare the simple facts of financial products like interests and fees with each other, it is now much easier for the consumer to get this information online. As long as we are not talking about structured products like asset backed securities – which even bank clerks have difficulties to fully comprehend – the market is pretty visible for the investors and provides an unlimited amount of data.<br /><br />As a consequence, the loyalty of the customers towards their bank has declined. Just take the tough competition around interest rate as an example. It tempts the consumer to switch quickly.<br />The answer for the financial services industry lies therefore in even more data and better information and analysis about their target customer groups. The traditional CRM is here sometimes not comprehensive enough as it only analyzes existing contracts of their customers. The problem with CRM is that it looks at the customer from the perspective of the company, not from the customer angle. CRM tries to identify new sales & service opportunities for their clients based on the processes of the bank.<br /><br />CMR – or "Customer Managed Relationships" is using a different approach. The concept of “CMR” started to be spoken about maybe two years ago but still gets not much attention. “Self service” is a term that is more broadly used and understood but misses the power of what customers really want. It looks at the saving from a company’s point of view, not the empowerment from the customer’s perspective.<br /><br />CMR means three things<br />1. The ability to question and reshape your organization and its knowledge in a way that it is at the disposal of your customers<br />2. Internet enabled management tools which customers use to get what they want<br />3. The ability to react to the information being generated and used by customers in order to increase profitability.<br /><br />CMR generates - if executed well – the following major benefits over CRM:<br />1. It is easier to implement because the customer is doing the more complex work<br />2. It creates more binding of your customers since customers having invested their data with the financial services institute will not move easily<br />3. It allows financial services organizations to move faster than their competitor since they are in a trusted relationship with their customer<br /><br />Companies need to understand CMR and then change accordingly. With the words of business strategist Gary Hamel – you need a well developed view of the future, whether or not it is true. You have to invest in the competencies to make that future come true. You need to experiment and learn to see which parts of your view are developing.<br /><br /><strong>“Customer managed” – a simple thought but with major impacts</strong><br />The consequence for the company is a loss of control. Customers will be in the driving seat, not the financial institution. They have to start thinking and behaving differently.<br />It may be hard to envision but it is nevertheless absolutely feasible – with internet enabled platforms and the right business intelligence –to imagine how whole industry processes can be reconstructed putting the customer in charge of their own needs by giving them the internet based management tools and data they require. This is what a customer managed relationship is about.<br /><br />The industry is currently not designed to serve customers that way. Almost every financial services institute puts the customer and the improvement of the relation to its customer base in their mission statement and strategy as a top priority. The mindset is clear. If they can establish a good relationship with their customers it will (hopefully) result in cross sell opportunities and more profit.<br /><br />However, the customers usually do not care so much about a relationship with their bank. They want results. If a customer asks for a loan a simple yes over the phone would do! In other words, the customer decides when a relationship with his bank is useful.<br /><br />Customers need to answer the question “How much money do I get and what shall I do with it?” all the time. Presenting this dynamic problem to a financial institution will be difficult to handle for them. Their CRM systems would not answer the question.<br /><br />With CMR you present the customer with the tools to manage his relationship with his bank. This can be a portal that provides the ability to key in (safely) the individual information about customers’ savings, pensions, investments, insurance information, salary etc. The customer then can decide to take a look at his portfolio from different angles, using dashboards. Benchmark information as well as learning algorithms based on the data provided and external market data will help the customer improving in managing his own finances. Only when he needs to contact a clerk or a bank analyst he can do so by triggering an action, an email alert etc.<br />This flexibility and self-control from the customers’ point of view may be too farfetched right now but it will most likely be the next evolution of customer relations in the financial services industry in an effort to retain their customer base.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-80749778251676746972009-09-18T14:50:00.001+02:002009-09-18T14:52:22.755+02:00Is the call for regulation of the financial market just a lip service?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.<br /><br />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.<br /><br /><strong>What measures are required in order to prevent this scenario from repeating itself in the future?</strong><br /><br />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.<br /><br />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!<br /><br />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!<br /><br />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.<br /><br />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.<br /><br />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.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-34015204435385746432009-09-11T16:00:00.002+02:002009-09-11T16:03:50.738+02:00Balanced Scorecard for Financial InstitutionsThe 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.<br /><br />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.<br /><br />With the help of a BSC<br />• You will find a common bottom line; common goals for all employees<br />• You will identify current strengths & weaknesses within your organization and derive actions for the future<br />• You will make binding agreements for the future<br />• You will control agreements key performance indicators (KPIs) in the sense of self-control<br />Due to the simplicity and completeness the BSC is the right tool to model your goals and indicators.<br /><br />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.<br /><br />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.<br /><br />The four standard perspectives according to Norton/Kaplan are<br />· Financial Perspective<br />· Customer Perspective<br />· Internal Processes<br />· Learning & Growth<br /><br />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:<br />· Risk Perspective<br />· Image<br />(In the manufacturing or retail industry the “supplier” perspective is often used)<br /><br />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.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-39378542923040678812009-09-10T10:55:00.002+02:002009-09-10T10:58:17.831+02:00New investments in secondary bondingA <strong>bond</strong> 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.<br /><br />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.<br /><br />There are two different types of bonds, bonds with fixed interest rates and those with variable interest payments.<br /><br />The following bonds fall under the first category (fixed-interest):<br /><em>Zero Bonds</em> – bonds without interest payments/coupon. The issue price must therefore be much lower than the nominal value of the bond<br /><em>Combined Interest Rate Loan</em> – 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.<br /><em>Straight Bonds</em> – 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).<br /><br />The second category (variable) can have the following forms:<br /><em>Floaters</em> – variable interest rates with a minimum (floor) and a maximum (cap) usually are using a reference interest rate like the one for government bonds.<br /><em>SURF</em> – Constant Maturity Treasury Step Up Recovery Floating Rate Notes, abbreviated SURF. In contrast to normal floaters they are oriented at short-term interest rates.<br /><em>Reverse Floater</em> – 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.<br /><em>Participation or income bond</em> – besides the redemption – a variable interest is payed based on revenue or dividends of the issuer.<br /><br />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!<br />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)!<br /><br />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.<br /><br />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.<br /><br />Deutsche Bank had also another reason for issuing their bond; they need money for the takeover of Sal. Oppenheim.<br /><br />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.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-7897750577570586892009-08-19T16:09:00.001+02:002009-08-19T16:09:39.276+02:00The Porsche – Volkswagen deal and the power of hedge fundsThe deal between Volkswagen and Porsche is complicated. In the past, Porsche bought shares of VW and acquired an interest of around 30% of VW. At that point there were only interested to be a minority shareholder. Then, they changed their strategy. The CFO of Porsche, Holger Haerter, developed – together with the CEO Wendelin Wiedeking – a complex financing model to take over Volkswagen. Part of this strategy was to invest in options and gamble with the stock price of VW. As a consequence the VW shares were sky rocking last year and made Porsches’ cash till ring. The hedge funds also played a part in this bet. Then, after a couple weeks, the VW shares went back to normal.<br /><br />However, one of the large Porsche shareholders and member of the board, Ferdinand Piëch, is also Chairmen of the VW board and he had different plans for the company. He wanted the transfer to work the other way round, i.e. VW takes over Porsche. In the end, he won the power struggle due to Porsches’ problems with repaying their loans and discovering new funds for the takeover. Wiedeking had to leave the company, together with his CFO.<br /><br />Now, the stock market reacts to these developments again. This time the hedge funds are betting on further dropping share prices which led on the one hand today to a drop of almost 20% of the stock price. One of the reasons is that Porsche has sold their options to Qatar. On the other hand the non-voting preference shares went up.<br /><br />That means that the biggest European car maker has lost more than $ 28 billion of its market value in just 2 trading days. It has to be seen if the hedge funds are right and the downfall of the VW shares will continue.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-72108756361712806122009-08-18T15:55:00.003+02:002009-08-18T16:00:06.490+02:00Do we have to expect a second banking crisis?The financial institutions in Europe are currently recovering slowly from the economic crisis when several experts stir up the next horror scenario. According to the valuation of the economists, the consequences arising out of the company insolvencies will hit the financial sector in a second round, this time especially the savings and loans, at full tilt.<br /><br />The small and medium sized businesses (e.g. in Germany) have received their loans mainly from saving and loan institutions. Due to the significant decline in turnover and export, those companies are struggling and often have to file for bankruptcy. Insolvencies and credit defaults of their clients will cause a lot of financial institutions to sway.<br /><br />However, the institutions will most likely weather the storm better than the last crisis, according to the chief economist of Allianz, Michael Heise, and I agree with him. The banks have reacted to the crisis and invested heavily into risk provisioning. In addition, the governments “rescue parachute” is already in place to help the financial institutions in need.<br /><br />Nevertheless the savings and loans who managed to remain stable through the first wave (due to their lack of risk appetite and their concentration on retail banking) have – like the other financial institutions – to ensure that their equity ratio is high enough and that they fully understand the risk involved and the probability of default of their loans. The right level of detail for this kind of analysis and appropriate reporting is therefore a must.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-59158331604298073532009-08-17T17:31:00.002+02:002009-08-18T12:32:58.184+02:00Colonial Bank went bankruptOn Friday, August 14, 2009, regulators of the Alabama State Banking Department shut down Colonial, the largest US bank to fail this year, based in Montgomery, AL.<br /><br />The bank which held about $25 billion in assets was a big lender in real estate development.<br />The Federal Deposit Insurance Corporation (FDIC) has been made receiver and approved the sale of Colonial's assets and $26.06 billion in deposits. Rival BB&T has taken over the bulk of Colonial's assets, the government banking agency said.<br /><br />Before the takeover, BB&T wants to secure fresh money. The bank therefore initiated the sale of new shares worth $750 million. It will be the biggest takeover for BB&T in its history.<br />Three other US banks filed bankruptcy the same day, the Community Bank of Arizona, the Community Bank of Nevada and the Union Bank, National Association.<br /><br />The states in the US that are hit hardest by the financial crisis are Florida and Georgia. Colonial operated mainly in Alabama and Florida and was therefore hit very hard by the burst of the real estate bubble. Unfortunately, the problems became to big so that, at the end, FDIC had to pull the rip line.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-42301941610400507602009-08-17T11:48:00.002+02:002009-08-17T11:54:27.015+02:00Closer look at liquidity risk is crucialLiquidity Risk is the risk that a financial institution does not have sufficient liquid funds to enable it to meet its obligations when they fall due, or that they can secure them only at an excessive cost.<br /><br />Thus, the effective management of liquidity risk allows a financial institution to meet its cash flow obligations – in all circumstances. Important to assessing liquidity risk and deriving the right management measures are robust cash flow models as well as sophisticated stress scenarios. Regulators are more and more emphasizing stress testing as a critical component of the risk management tool set of a financial organization because it enables a better understanding of the liquidity risk profile and it also helps to model the liquidity risk appetite.<br /><br />The financial services authorities (FSA) in the UK proposed recently new rules that are based on recently agreed international liquidity standards, in particular the Basel Committee on Banking Supervision’s (BCBS) Principles for Sound Liquidity Risk Management and Supervision, published last June, and also take into account difficulties faced in the market over the past 18 months.<br /><br />The FSA’s proposals emphasize the responsibility of firms’ senior management to adopt a sound approach to liquidity risk management, and present the following changes:<br /><br /><ul><li>All regulated entities must have adequate liquidity and must not depend on other parts of their group to survive liquidity stresses, unless permitted to do so by the FSA. </li><li>A new systems and controls framework based on the recent work of the BCBS and the Committee of European Banking Supervisors (CEBS). </li><li>Individual liquidity adequacy standards for firms based on firms their being able to survive liquidity stresses of varying magnitude and duration. </li><li>A new framework for group-wide and cross-border management of liquidity allowing firms, through waivers and modifications, to deviate from self sufficiency where this is appropriate and would not result in undue risk to clients. </li><li>A new reporting framework for liquidity, with the FSA collecting granular, standardized liquidity data at an appropriate frequency so the FSA can see firm-specific, sector- and market-wide views on liquidity risk exposures. </li></ul><p>The FSA hopes to introduce the new rules in October 2009. These rules will come along with new reporting requirements. I believe that these new rules are important, not just in the UK but for financial institutions as a whole to manage liquidity risk more efficiently. Therefore I would be surprised if these new regulations are not adopted quickly by the other (European) countries.</p>R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-80419050123606114632009-08-14T14:41:00.002+02:002009-08-14T14:41:58.579+02:00Funds Transfer Pricing<strong>Funds Transfer Pricing</strong> (<strong>FTP</strong>) is an internal measurement and allocation process that assigns a profit contribution value to funds gathered and lent or invested by the bank. It is a critical component of the profitability measurement process of financial institutions, as it allocates the major contributor to profitability, net interest margin. An intermediary is created within the organization (bank or insurance) to manage FTP, usually Treasury.<br /><br />The business units of the financial institution routinely receive funds from their depositing customers and other third parties. These funds are then thereupon invested in loans and investments (sometimes through different business units) to borrowing customers and / or third parties.<br /><br />The amount, terms, and interest rate of funds collected and invested are described in financial agreements between the organization and its customers. The interest payments on these funds contribute to the overall net interest margin of the institution, defined as the difference between interest revenue earned on funds used to acquire assets less the interest expense on funds gathered. In other words, funds transfer pricing determines the cost of funds for the asset side and a value of funds for the liability side. The net interest margin of the institution and the value of its financial contracts fluctuate as market conditions and the underlying cash flow of the funds change over time.<br /><br />Even though, business units and the customers participate in the continuous intermediation process, the contribution to the net interest margin and value is not equal by all participants. The amount of funds received and provided is rarely matching. The task of the funds transfer pricing process is therefore to measure and assign the discrete contribution of funds – when assessing their overall profit contribution – by business unit, product and customer.<br /><br />There are usually two methods to calculate the net margin and value contribution of funds, the pooled approach and a specific assignment approach. The pooled approach assigns funds to financial instrument pools created under a predefined set of criteria (e.g. type of balance, term, reprising term, payment frequency, and origination) with transfer rates derived either internally, based on actual rates earned or paid, or as an alternative, by market derived interest rates and adjusted for risk.<br /><br />The specific assignment or single rate method approach uses transfer rates based on asset yields, which favors net funds provider’s contribution. The deficiency of that approach is it assumes that all funds have equal importance to the financial institution. No differentiations based on the value of fund attributes nor the market conditions at the origination of the transaction are taken into account. However, multiple pool approaches that use contemporary market rates lack the ability to benchmark management decisions made at the time of initial transaction pricing.<br /><br />In any case, by assigning a transfer price to each component on the balance sheet, you can compare the earnings resulting from the use of each asset to alternative uses, compare the cost of each source of funds (liabilities) to alternative sources, and measure the profit contribution of each asset or liability. The typical reports are either two dimensional or OLAP reports that show initially the balance sheet and various columns with the comparisons and offer then drill down capabilities by the various criteria. Dashboard, showing the relevant measures like net interest margin and various visual representations of the balance sheet components, the comparisons mentioned above (e.g. in form of a bar chart), and the yield in form of a graph, are also commonly used.<br /><br />Due to the fact that all financial instruments need to be pooled and calculated to receive the funds transfer prices the data volume is very high and the reporting tool need to be able to cope with this volume in an efficient way. In addition, the format of the two dimensional reports is usually stated. Hence, the BI tool needs to reflect this by providing “pixel-perfect” reporting, i.e. the ability to arrange all items on the report exactly as needed, something that not many reporting tools can master.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-59137370042946740852009-08-13T16:29:00.003+02:002009-08-13T16:32:09.940+02:00Scalability of dataThe financial services industry is known for its <strong>large data volumes</strong>. The need for detailed customer information and extensive financial analysis, the consideration of risk management, regulatory changes, and fragmented liquidity has led to an explosion of (market) data volume.<br /><br />There is also the fact that all institutions in the financial services have to deal with <strong>very sensitive data</strong>. Detailed information on credit card holders and their transactions, the medical history of health insurance policy holders, the financial situation of clients (e.g. in wealth management) are just a few examples of the confidentiality of the data these organizations are dealing with on a daily basis. That is why the demand for highly sophisticated security mechanisms is a common theme in this industry.<br /><br />A third determining factor for financial services is <strong>performance</strong>. Trading departments need real-time information on the stock market; a hedge fund manager wants to follow up on the performance of his fund with the ability to analyze deeper to understand the cause of changes; the CRO requires quick information to manage the risk and minimize the expected loss; a financial analyst in an insurance company is interested to find hidden patterns in the customer data helping him with new business opportunities.<br /><br />Thus, financial institutions require a <strong>scalable solution</strong> that can cope with large data volumes, ensure the right level of security and can handle the magnitude of requests from stakeholders and a growing user community<br /><br />These needs resulted in huge investments in IT architecture to manage the amount of data and provide the right framework. One of my customers, one of the biggest banks worldwide, had ordered hardware with multiple Petabyte of disk space. Their aim was to report the consolidated bank at the detailed financial instrument level on a daily basis. The data load for this kind of endeavor into a data warehouse (DW) had to be optimized with sophisticated sort algorithms in order to provide the data on time. Once the data was in the operational data store of the DW the data had to be cleansed, enriched and then loaded into a data mart that is optimal for reporting.<br /><br />While the development of a well defined data warehouse is a good concept and worth doing, in this particular instance the time between the transactions took place and their reflection in a report was just too long. For the daily group consolidation report it was sufficient, but only if the intercompany transactions were matching. If not, an exception report was produced and someone had to check all payables and receivables where the relations were not matching. Once this manual review was finished, the corrected results were entered into the enterprise resource planning system (ERP), which then triggered an update of the DW and the following processes.<br /><br />That is not optimal for ad hoc reporting and definitely not a solution for some of the demanding business requests mentioned above (time is money). As such a reporting tool that can access the transactional data directly, combining it with the information from the other sources and presenting the information with the help of an integrated metadata layer is preferable.<br /><br />Depending on the role of the business user it is not necessary to have always the full low level detail visible in a report. The CFO for example wants to get a quick overview of the business. An aggregated dashboard with the key performance indicators that are relevant for the CFO will work. Wherever a more thorough analysis is required, he can look at the KPI from different angles (e.g. segments, products, channels), just by clicking on a different tab of the dashboard. If that is still not detailed enough a deep-dive into the transaction report directly from the dashboard is possible. We have implemented that multiple times and it is always remarkable how well received the variety of visualizations, the flexibility of report development, the ease-of-use, and the scalability of the reporting tool is. The ability to drill anywhere with great performance, even when handling enormous data volumes is essential for the business to become as efficient as possible and is a great competitive advantage!R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-28728865741813745622009-08-13T10:50:00.000+02:002009-08-13T10:53:57.279+02:00Solvency II and its consequencesThe first regulatory requirements for insurance companies in the European Union were introduced in the 1970s, known as Solvency I. Since then, sophisticated risk management systems have been developed.<br /><br />Solvency II introduces a comprehensive framework for risk management for defining required capital levels and to implement procedures to identify, measure, and manage risk levels. It is the updated set of regulatory requirements for insurance firms that operate in the European Union.<br />The rationale for the European Union behind this framework is the development of a Single Market in insurance services in Europe, whilst at the same time securing an adequate level of consumer protection.<br /><br />Solvency II is based on economic principles for the measurement of assets and liabilities. Risk will be measured on consistent principles and capital requirements will depend directly on this which means that it is a risk-based system, too. It is somewhat similar to the banking regulations of Basel II. It also consists of three pillars:<br /><br />· Pillar 1 focuses of the quantitative requirements (e.g. the amount of capital and insurer should hold)<br />· Pillar 2 consists of requirements for the governance and risk management of insurers, as well as the effective supervision of insurers<br />· Pillar 3 concentrates on disclosure and transparency requirements<br /><br />A solvency capital requirement may have the following purpose:<br />· Reduce the risk that an insurer would be unable to meet claims<br />· Reduce the losses suffered by policyholders in the event that a firm is unable to meet all claims fully<br />· Provide early warnings for supervisory so that they can react promptly if capital falls below the required level<br />· Improve the confidence level in the financial stability of the insurance sector<br /><br />I think Solvency II is an important step forward in the effort to improve insurance regulation, to foster risk assessments and to rationalize the management of large firms. The directive, especially if complemented by indicators that take the lessons from the crisis into account, would remedy the present fragmentation of rules in the EU and allow for a more comprehensive, qualitative and economic assessment of the risks.<br /><br />The directive has been agreed by the EU and will be implemented starting year 2012. For the insurance industry this will mean a paradigm shift of their business related decision processes. The goal is not to create more regulations. It must be in the interest of the industry itself to find solutions, risk models, and other concepts that prepare them for upcoming crisis. Solvency II is just a vehicle to articulate those needs and guide the insurers in the right direction.<br /><br />Right now, the insurance industry reached the point where they understand the necessity of an intelligent risk management. It is recognized as a value generating process as well as a competitive advantage. However, the implementation of Solvency II is still in the early stages of development.<br /><br />It is easier for large insurance organizations to budget for the development of company-specific risk models. For small insurers this is a real obstacle, which leads them to the conclusion that they have to build their models still Excel-based.<br /><br />Besides, the main hurdles for the implementation of Solvency II seem to be data availability and quality. Insurance companies are known for their heterogeneous IT system architecture. Data consistency, data integrity, flexibility and good performance of reporting and analysis are not easy to achieve. In fact, the contrary is true!<br /><br />So what are the consequences?<br /><br />Even though the insurers have still some time before the implementation of Solvency II is mandatory, they definitely need to start working on a solution that fits their needs for their own sake.<br /><br />Insurance companies do not have all the answers themselves. They need to reach out to experts who know how to extract their data, identify the right KPIs, build an integrated, qualitative good and consistent data layer, and a flexible, well performing reporting solution that meet their needs and the requirements of Solvency II.<br /><br />An integrated BI system that enables the business to analyze their data quickly down to the deepest level while at the same time building the confidence in the accuracy of the data is priceless. The feedback that I am receiving from my clients is that easily understandable state-of-the-art reporting capabilities (like dynamic dashboards) that allow the user-specific visualization of information from different angles without making the mistake of being to excessive help significantly with the adoption of the new regulations.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-30769730257948154112009-08-12T12:52:00.000+02:002009-08-12T12:54:30.169+02:00Profits for insurers in a tough marketIt is obvious that we currently live in challenging market conditions. Companies are forced to rethink their strategies and their approach to business. Insurance companies are no exception to this rule. Like other industries, insurers take a closer look inward and examine the unrealized value of different sources of revenue.<br /><br />Typically, the two main sources of revenue for insurers are:<br />1. Underwriting profits<br />2. Investment gains<br /><br />While insurance companies do not suffer from the financial crisis like the banks, the returns on investment in a barren economic environment decreased significantly. Thus, companies are forced to maximize their profits from underwriting and ensure that they have optimal strategies to achieve this end.<br /><br />A critical strategy for insurers to maximize returns from writing new business is creating new sales opportunities for existing customers. That sounds simple but the challenge is to identify the right products for the proper audience. Therefore insurers strive to gain access to insightful policyholder information that helps them sell more.<br /><br />Of course it is not possible for the companies to know everything about their customers. Still, they attempt to achieve as much as possible to segment customers, position products, and target customers most effectively.<br /><br />The unique problem of insurance companies is the lack of interaction with their customers, they are dependent on loyalty. The relationship between a consumer and an insurer is normally initiated at the time of a significant life event, such as the purchase of a new car, a new house, or the anticipation of a new baby.<br /><br />Once the customer has evaluated the insurance market to get the best coverage for a low price he contacts an agent or the insurer directly to get the deal done. With the signature under the policy contact between the policyholder and the insurer is limited, if required at all. Automatic policy administration systems take care of the billing and renewals. Delinquencies and address changes seem to be the only reasons for interaction. When these rare situations occur most insurers are not prepared to foster the relationship to achieve stronger customer loyalty and/or capitalize on the sales opportunity with intelligent customer insight.<br /><br />A proper customer analysis for an insurance company has usually to deal with fragmented data sources due to mergers and acquisitions that were necessary to penetrate new markets or utilize new channels. An integrated view of this data is – even when it is tedious to build – important for proper customer care.<br /><br />Business Intelligence (BI) solutions are the answer to these demands. They are not just reporting tools. They can translate the data into actionable insight and additional revenue opportunities for the businesses.<br /><br />Today, best-of-breed BI platforms can be cost-effectively deployed to tap into and query a number of different sources of data to produce useful information based upon historical and real-time data, and predictive models. Resulting information about customer demographics, product performance, and next-best actions can empower companies to uncover hidden opportunities and devise strategies to maximize customer value.<br /><br />What do insurance companies know about their customers? Which customers are most profitable? Can a positive ROI be generated with this customer? What is his growth potential? What product bundles can be marketed to him?<br /><br />These are just a few questions that BI can help answering. Combining multiple data sources like marketing data, policy statistics, financial data, demographics etc. with a unified, integrated metadata layer can lead to the right product mix. Clustering of customers and the usage of predictive analytics can identify hidden patterns in loyalty and buying behavior that had been previously overlooked. In addition, managers of multiple lines of business have more data at their disposal, enjoy greater flexibility with more analytic capabilities, and receive unique, targeted offerings from which to choose.<br /><br />Another advantage of BI – in comparison to the traditional spreadsheets, still very popular with insurers – is the incorporated security. The customer data is very sensitive and requires a sophisticated security in place in order to prevent unauthorized data access. Besides, the various intuitive visual representations of information that BI provides (e.g. ad hoc reporting or multiple dashboard books that present all relevant information at a glance) and the fast performing distribution of reports to a wider audience are key factors for an efficient information delivery strategy.<br /><br />Last but not least, the demand for scorecards that represent the key performance indicators of the insurance company (branch or department) in a colored scheme, i.e. “traffic lights” where green represents a KPI on target, yellow indicates a possible problem and red shows a value that is out of range, is becoming more and more evident.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-60014091086309591652009-08-12T10:35:00.000+02:002009-08-12T10:41:27.581+02:00New reporting requirements due to bad banksBad Bank is a term for a financial institution created to hold nonperforming assets owned by a federally insured bank. The purpose of such institutions is to address challenges arising during an economic credit crunch wherein private banks are allowed to take problem assets off their books.<br /><br />In the United States, the Emergency Economic Stabilization Act of 2008 (commonly referred to as a bailout of the U.S. financial system) suggested the creation of such bad banks as a response to the ongoing subprime mortgage crisis in the U.S.<br /><br />Other countries like Germany followed this idea as a result of the financial crisis.<br />The problem with bad banks is the moral hazard effect. The construct that allows a financial institution to transfer their risks to the bad bank and the government will create an incentive for such financial institutions to take on higher risks in the confidence that they can pass on these risks. In addition, the bad bank is not a ‘normal’ market participant. The banks may gain trust by transferring their bad assets (e.g. asset backed securities), the bad bank itself not. The bad bank is – until it is reincorporated – dependent on government funds.<br /><br />A positive example of a bad bank is Securum, a Swedish bank founded in 1992 for the purpose of taking on and unwinding bad debts from the partly state-owned Nordbanken bank during the financial crisis in Sweden 1990-1994. Many of the debts were owed by real-estate companies and it became a goal for Securum to stabilize the property market.<br /><br />The company took over a quarter of the bank's credit portfolio, comprising 3000 credits with 1274 companies and the management of Securum were given free hands. By 1994 a large number of credits were unwound and by summer 1997 Securum itself could be wound down.<br />The ways bad banks are structured differ. In Germany for example, banks are now allowed to transfer their bad assets into such a bad bank to adjust and unburden their balance sheet. That will enable the banks to get fresh equity capital. However, it is not that simple. The banks have to build a special purpose community that buys the toxic papers for 90% of their value as of 30th June 2008. Since their value is currently much less, the banks have to pay the difference in equal installments over a period of 20 years (and a fee for the government securities). This means they cannot get rid of the problematic assets in total.<br /><br />For a financial institution that follows this path (it is voluntary!) the finance and controlling departments as well as the risk management department will have more work to do. Additional reporting requirements will occur.<br /><br />The normal financial statement will not include the toxic papers and will reduce the balance sheet. However, the bank has to build accruals for the installments (if their reporting GAAP allows accruals to be built). In addition, they will also build an internal management view of the financial statement which will include the impact of the bad assets, i.e. the installments.<br />Additional reporting will be also required for banks that are evaluating the possibility of using the bad bank on the risk management side. The calculation of risk needs to be reviewed and new KPIs have to be included in the dashboards that simulate the impact of the toxic papers on and off the balanced sheet.<br /><br />Furthermore, the executive board, which is now sometimes influenced or controlled by the government, has additional reporting needs that give them better oversight of the business.<br /><br />The risk appetite of financial institutions (despite the bad banks in place) may have changed but is still apparent. yet the risk models and the funds transfer pricing calculations are adjusted to the new circumstances. These will most likely impact the reporting needs as well. More in-depth knowledge of the loans, mortgages etc. by various attributes / dimensions is required in order to fully understand the loss given default (LGD), probability of default (PD), and the expected exposure rate (EE) – to name just a few risk indicators.<br /><br />The analysis of risk is complicated and requires a vast amount of data. It is not sufficient to concentrate on a “risk cube” or “risk data mart” for reporting. The financial institutions demand an analysis across multiple source systems, including external benchmarks, as well as low level detail information (probably down to the transaction level).<br /><br />A reporting tool that can fulfill this multi-sourcing without any problems and can drill anywhere to the detailed data is therefore mandatory, at least that is the feedback that I am receiving from my customers.R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-2148255254192612652009-08-11T10:52:00.000+02:002009-08-11T11:52:56.216+02:00Does size matter for an investment fund?The size of an investment fund is in the line of business usually the main characteristic for the success of the fund. However, sometimes the volume can become a burden because it makes it more difficult to respond quickly to changing market conditions.<br /><br />Top funds with an A-rating, good performance, and a couple years of a market presence are managing much higher voloumes than those with bad performance (according to a study from the Feri Eurorating Services rating agency). The probability of a causal relationship between the success of a fund and the willingness of investors to invest, which impacts the volume, is obviously pretty high.<br /><br />However, that does not necessarily mean that small funds cannot produce a good performance. Especially in niche markets are smaller funds preferable because they allow a more flexible fund strategy.<br /><br />I think the main differentiator for sustainable success is information and how this information is used.<br /><br />What does that mean for the fund managers / the investment bank?<br /><ul><li>The investment bank should try to diversify their portfolio to mitigate the risk. This can be achieved by issuing a good mixture of larger and smaller funds.</li><li>The fund managers are dependent on the data from different sources, i.e. market data, benchmarks, financial information, etc. to make better informed decisions.</li><li>Fund managers of larger funds cannot react as quickly as fund managers of smaller funds. Both need the right KPIs (e.g. risk measures like volatility and VaR) always at their disposal. They also need to analyze the data from different angles.</li><li>The strategy may be different for funds of different sizes, the information demand is similar. Transparency of data is always key.</li><li>In order to obtain the good ratings of their funds they need to impress their investors as well as the rating agencies. The best way to do this is good performance and an excellent presentation of the fund progression.</li></ul><p>Detailed information about the performance of the fund and the reasons for the development across multiple data sources, transparency, flexibility of data analysis, and good performance when handling large volumes of data are key factors for the success of fund managers. That is the domain expertise of Business Intelligence. </p><p>To sum up, the volume of a fund may be important but without the knowledge and the trust in the data a fund manager cannot ensure the future success of his fund. I have seen that multiple times, dashboards that present the fund manager with all relevant information at a glance with the ability to analyze further and the option to distribute the results easily to other stakeholders can make the difference between a well performing and an excellent performing investment.</p>R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0tag:blogger.com,1999:blog-818022092784557479.post-56627686850507278792009-08-10T17:10:00.000+02:002009-08-12T10:43:56.839+02:00Control of Rating Agencies<span style="font-family:arial;">A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain type of debt obligations as well as the debt instruments themselves. Sometimes, the servicers of the underlying debt are also given ratings.</span><br /><span style="font-family:arial;"></span><br /><span style="font-family:arial;">Most of the time, the issuers of securities are companies, special purpose entities, non-profit organizations, or governments (local, state or national) issuing bonds or other debt-like securities that can be traded on a secondary market.</span><br /><span style="font-family:arial;"></span><br /><span style="font-family:arial;">A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued.</span><br /><span style="font-family:arial;"></span><br /><span style="font-family:arial;">There are more than 150 rating agencies existent (with local or industry focus) but the big 3 agencies are dominating the market:</span><br /><span style="font-family:arial;">• Moody's </span><br /><span style="font-family:arial;">• Standard&Poors (S&P)<br />• Fitch</span><br /><span style="font-family:arial;">In the beginning of the agencies (around 1909) the investors had to pay for the ratings. This changed in the 1970s, when the issuer payed the bill of the agencies. </span><span style="font-family:arial;">Nowadays it is a mixture of both but most of the time issuers have to pay the rating agencies.</span><br /><span style="font-family:arial;"></span><br /><span style="font-family:arial;">This is causing problems. </span><br /><span style="font-family:arial;">First of all, the 3 big agencies can influence the market quite significantly due to their market position and reputation. Their ratings can become a "self-fullfilling prophecy".</span><br /><span style="font-family:arial;">Secondly, the rating agencies receive their money from their clients. Therefore they are dependent on the goodwill of their clients. An objective rating can therefore not always be expected.</span><br /><span style="font-family:Arial;">As a consequence, especially due to the current financial crisis, the request for more (independent) control of the rating agencies becomes more important.</span><br /><span style="font-family:Arial;"></span><br /><span style="font-family:Arial;">A perfect example is the rating of mortgage-backed securities (CMBS). </span><br /><span style="font-family:Arial;"></span><br /><span style="font-family:Arial;">It is obvious that the real estate bubble / sub-prime crisis was one of the main triggers of the current economic downfall. Thousands of real estate loans with high risk of default were packaged into very complicated collaterilized debt obligations (CDO), e.g. CMBS, and sold all over the world.</span><br /><span style="font-family:Arial;">When the real estate market plummeted and the credit default rate increased dramatically, the financial institutions who invested heavily in the CDOs had to write down their values in their balance sheets dramatically.</span><br /><br /><span style="font-family:Arial;">The governments around the globe fought against the crisis but also demanded a higher control of the agencies as they had given these risky financial products always top ratings.</span><br /><span style="font-family:Arial;"></span><br /><span style="font-family:Arial;">The rating agencies reacted in July. S&P downgraded the CMBS to a very low "BBB-". However, the main issuers of the CMBS were Goldmann Sachs, JP Morgan Chase, Morgan Stanley, Credit Suisse, and Wachovia.</span><br /><span style="font-family:Arial;">Without a top rating they cannot deposit their CMBS - within the framework of the existing programme of the Federal Reserve - as security in return for credits.</span> <span style="font-family:Arial;">Hence they were up in arms about the rating of S&P.</span><br /><span style="font-family:Arial;"></span><br /><span style="font-family:Arial;">S&P who had just downgraded these complex financial products withdrew their ratings one week later due to the enormous pressure of the issuers, their clients, and awarded the CMBS again with the top rating of "AAA"!</span><br /><span style="font-family:Arial;"></span><br /><span style="font-family:Arial;">Of course there are justifications for this move and yes, in general (e.g. in the years before the crisis) the CMBS may be a save store of value, but they are so complex that even the bank clerks have difficulties to understand the underlying risk. Some of these financial products require the reading of up to 90,000 pages to fully understand their structure.</span> <span style="font-family:Arial;">Therefore a rating of AAA is more than questionable.</span><br /><span style="font-family:Arial;"></span><br /><span style="font-family:Arial;">So what is the bottom line?</span><br /><span style="font-family:Arial;">In my mind, the dependency of rating agencies on their clients has gone too far. They are not objective. </span><span style="font-family:Arial;">An independent control board (from the governments and/or the federal banks) should be put in place. In addition, the payment of rating agencies need some review. I think we should go back to the concept that investors are paying for the ratings not the issuers.</span><br /><span style="font-family:Arial;">As Ben Bernanke, the chairmen of the Federal Reserve Bank, has said, the insolvency risk of this market carries a huge risk for the whole economy. Therefore he demanded that the problematic loans have to be restructured in a way that the probability of default drops significantly. He is right!</span><br /><br /><span style="font-family:Arial;"></span>R. Schulzehttp://www.blogger.com/profile/16070861978848328733noreply@blogger.com0