International Senior Entrepreneurial
Leadership Program
ISEP
2004
Prof. Dr. Beat Bernet
sb/f - Swiss Institute of Banking and Finance
s/bf – Swiss Institute of Banking and Finance
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© Beat Bernet
Session Objectives
• To evaluate the changeing role of banks as financial intermediaries in the
lending process
• To understand the strategic considerations of banks in the lending process
• To understand the advantages / disadvantages of new financing
instruments like asset securitisation, mezzanine finance or risk transfer
s/bf – Swiss Institute of Banking and Finance
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© Beat Bernet
Core Functions Financial Intermediation
Financial intermediation functions provide

method of clearing and settling payments

mechanisms for pooling of resources

ways to transfer economic resources through time and across distance

methods of managing risks


price information to help coordinate decentralized decision-making in
various sectors of the economy
ways of dealing with incentive problems created when one party to a
transaction has information that another party does not have or when one
party acts as agent for another one.
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© Beat Bernet
Transformation of Financial Systems
Dimensions of Demand
Structure
Content
Verhalten
Dimensions of Risk
Dimensions of Technology
Addedvalue
Metarisks
Financial
Intermediation
Systems
Systems
Society
&
Culture
Volatility
Risk on
Systems
Normative Dimensions
Politics
Ethics
s/bf – Swiss Institute of Banking and Finance
Law
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© Beat Bernet
Future Effects of Technology: Three Theses
1. So far technology was focused on changeing processes. Today and in the
future it will transform the whole transactions systems.
2. So far technology was used to profit from various forms of economics of scale
and scope; in the future it will open opportunities to benefit from net
economies.
3. So far technology in banking had a strong instrumental character. In the future
it will affect and change social habits and structures in all client segments.
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© Beat Bernet
Competitive Environment
Effects of the intensification of
competition
Consequences for competitive
strategies
 Innovative advances of new and
established competitors
 Disappearance of competitive
advantages
 Increasing aggressiveness of
competitive behaviour
 Reduction of entry barriers
 Shift of balance
 Homogenous services
 Reduction of core capabilities
 Intensification of pricing competition
s/bf – Swiss Institute of Banking and Finance
 Parallelism of decisions and measures
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© Beat Bernet
Reorientation Bank Credit Policy
Transaction level:
•Rating
•Pricing
Ojective:
Increase ROE
Portfolio level:
•Credit portfolio
•Risk transfer
Operational level:
•Decision structures
•Statistics/methods
s/bf – Swiss Institute of Banking and Finance
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© Beat Bernet
Credit Pricing
Expected probability
of default
EPD
x
Loss Severity
LS
Loan
Amount
x
L
•Rating client
•Rating transaction
•Collateral
•Product
•External aspects
•Product
•Maturity
•Amount
= Overal rating
= Recovery rate
= Exposure
s/bf – Swiss Institute of Banking and Finance
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Expected
Loss
=
EL
•Basis for
risk premium
© Beat Bernet
Building Blocks Loan Contacts
Legal characteristic of capital
Repayment
Pricing
Collateral
Maturity / Time structure
Options
s/bf – Swiss Institute of Banking and Finance
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© Beat Bernet
Metadecision for Business Strategy
Added-Value
Cooperation
Competence
Brand
Business Model
Risk
Culture
s/bf – Swiss Institute of Banking and Finance
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© Beat Bernet
Example Corporate Banking:
Today‘s Business Model
Credit Approval
Debtor
Sale
Relationship Management
Portfolio Management
Limits
etc.
Rating & Decision
s/bf – Swiss Institute of Banking and Finance
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© Beat Bernet
Elements of a new Business Model in
Commercial Banking
Debtors
Origination
Independent
Risk Assessment
and Rating
Portfolio
Management
• Expected and
unexpected Loss
• Mark-to-MarketValuation
• Risk-based Limits
• Risk and Rate of Return
Optimisation
• Portfolio Transfer Price
Credit Sale
Securitisation
Hedging
Acquisitions
Secondary Market
Client
Management
Hold to Maturity
Credit Transaction / Administration
s/bf – Swiss Institute of Banking and Finance
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© Beat Bernet
HAT-Transaction
Credit Default Swap*
Bonds Issue
Subscription
Initial and annual
CDS Risk Premium
HAT**
Subscription
Pledge
Interest /
Repayment
of Principal
Balance
Interest /
Repayment
of Principal
Class B Bonds
CHF 100,000,000
Credit Protection
Payment up to
CHF 350,000,000
Class A Bonds
CHF 250,000,000
CHF 2,500,000,000
Reference Portfolio
UBS AG
Subordinated
Pledge
Collateral
CHF 350,000,000
•
Obligations to make the Credit Protection payment are contingent upon the Loss Balance being greater than zero (i.e. the aggregate Credit
Protection Payment Amounts exceeding the Loss Threshold of CHF 125,000,000).
** Not shown in the transaction chart are the Calculation Agent, the Corporate Administrator, the Security Agent and the Bondholders‘ Representative.
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© Beat Bernet
Conclusions
1. Commercial banking is in a dramatic process of reorientation. For the borrower it is
extremly important to understand this transformation which takes place in the
financial industry.
2. Key element of this transformation is from a borrowers point of view
disintermediation. This opens new opportunities for designing financial contracts
between investors and borrowers as well as between borrowers and financial
intermediaries.
3. As long as we focus on traditional dept management, we probably will pay too much
for specific financing transaction, due to information asymmetry and inefficient loan
markets.
4. In designing a dept contract, all six basic elements of a loan or a bond should be taken
into consideration. Loans can be creative, complexe products tailored to the individual
risk / return profiles of lenders and borrowers.
5. With the widening of the integrated european financial market based on the EURO
there will be a widening market for creative, even exotic loan products. For borrowers
this will open new financing facilities and reduce the average cost of capital.
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© Beat Bernet