The financial system is currently undergoing a huge process of transformation, moving away from purely volume-based capital requirements to capital optimization in terms of the quality of minimum capital requirements. In the future, the financial system should be driven by capital, and not, as in the past, debt-driven. According to estimations made by McKinsey & Co, a total capital gap of 110€ billion will be incurred by European banks due to new regulations and requirements.

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The transformation process is mainly driven by rising capital requirements (Basel III, Basel IV and TLAC) and the implementation of new accounting standards (IFRS accounting). Also, higher reporting standards, according to BCBS 235, will be introduced.

In October of this year, the European Central Bank published a first draft for handling distressed loans or so called NPLs (Non-performing Loans). These requirements are intended to increase the pressure on European banks to significantly reduce the share of non-performing loans in the balance sheet. The European Central Bank currently holds 1 billion € on non-performing loans, by buying them on the secondary market. Banks are expected to have full coverage for the unsecured portion of new NPLs at the latest after 2 years and for the secured portion at the latest after 7 years. At the same time, the ECB will gradually reduce its bond purchase program (QE).

Capital therefore becomes scarcer and more expensive. Therefore, it is essential for many banks to find out how this resource can be optimally used in the company. The following two steps can help:

  1. Determine in which business areas how much capital is consumed
  2. Planning and simulating consumption based on different scenarios

The SAP Bank Analyzer offers several advantages in the exact determination of the capital consumed by a bank:

  • Risks are evaluated individually.
  • The Bank Analyzer can be integrated into existing systems to avoid redundant data and malfunction.
  • Risk levels can be determined freely and assigned to the corresponding risks. This enables a multi-factor analysis of the portfolio with several risk variables.

The powerful memory database in SAP HANA guarantees a quick calculation of risk assets and consumed capital, in different scenarios.

For most, the SAP Bank Analyzer is just one component to prepare banks for the stricter reporting requirements. However, the Bank Analyzer can also lay the foundation for an IT infrastructure that helps to answer the following questions:

  • What is the expected profit for the strategic plan?
  • How much capital is consumed for the created strategic plan?
  • What are the liquidity losses?

SAP technology can help banks to successfully meet the challenges of capital optimization and the ongoing transformation process. We at INKUBIT are already convinced of the Bank Analyzer and its capabilities. It is probably only a matter of time before most banks have understood that new tools are needed for future challenges.