GlobalFinancialSupplyChainModel

Parasuram Balasubramanian, Founder & CEO, Theme Work Analytics, Bangalore

& Entrepreneur in Residence at Purdue University, USA

balasubp@gmail.com

A Research Initiative of

Presented at the Enterprise Integration Consortium Industry Advisory Board Meeting PennState University USA Feb 6, 2009

Copyright belongs to Theme Work Analytics Pvt Ltd

Retail Bank

Prime Mortgage

Subprime Mortgage

Personal loans

Credit Card

Auto Loans

Insurance Firm

Investment Bank

CDS

Loan default cover

GlobalFinancialSupplyChainModel

•  The Melt down of financial institutions during 2008 in USA started as a subprime crisis in the mortgage banks and spread to the investment banks in no time. Its impact was felt in the retail banking sector as a credit squeeze and in the international banking system as a crisis of confidence in credit worthiness.

•  Both manufacturing and services industries have been adversely affected in USA and in other countries with export dependency. It is felt that the global economy would need two years to come out of this crisis.

•  Global markets and experts have been caught unaware. None of the tools , techniques and models developed in the past has helped to predict the occurrence of this crisis nor to project its magnitude. Models dealing with international trade, money supply and balances, input output evaluators etc have failed to issue any forewarning.

•  The Supply Chain Management [SCM] approach is an attractive alternative to model this scenario for future use.

GlobalFinancialSupplyChainModelBackground

SCM models deal with •  Flows of goods, funds and information [can be extended to include other

factors]

•  Multidimensional Flows.

•  Interdependency of stakeholders.

•  Supply and demand side impacts. [can cascade them either way]

•  Flow constraints and delays.

•  Risk related issues as well.

They can be used to explain past behavior, to predict trends and/or to determine the impact of control variables. Hence the Global Financial crisis can be studied by modeling it using the SCM concepts.

GlobalFinancialSupplyChainModel

Background

•  To Show the linkages in the financial chain across assets and risk categories within a firm and its industry

•  To show the linkages between related industries ( Banks, Insurance companies)

•  To show linkages to the industrial/manufacturing sector

•  To show the impact on general economy and public at large

•  To analyze the growth of firms” too big to fail”

•  To show the anomaly of large institutions becoming more risky and not vice versa

•  To show the relationship of funds flow to Asset titles flow

•  To show the globalization impact

•  To reveal the causal mechanisms

•  To show the development of crisis of confidence

GlobalFinancialSupplyChainModelGeneral Objectives

•  To study factors of vulnerability within an industry ( debt/equity structure, product mix, legal binds)

•  To study regulatory mechanisms and policies as they differ from one country to another( why has India survived the disaster)

•  To know the weakest links in the chain

•  To understand the consequences of a break in a link

•  To evolve a framework for analyzing the effectiveness of legislation such as SOX

GlobalFinancialSupplyChainModelGeneral Objectives

•  Traditional models explore flows of Goods and NF Services, Funds and Information. We intend to explore the flow of Obligations/Commitments explicitly.

•  Flows occur between a firm and its customers, between firms in an industry, across industries in an economy ( or nation) and across nations.

•  We intend to study these flows using a Four Layer Model,viz

Between countries

Between industries in a country

within firms an industry

Between a firm and its customer segments

•  Customer segments represent varying risk classes

•  It is our belief that all other types of risks can be reduced or converted to equivalent financial risks.

•  Financial risks are loss of earnings, erosion of capital, cash crunch and inability or unwillingness to borrow/lend

GlobalFinancialSupplyChainModelThe Four Layer Model

•  Funds flow at any given time occurs due to two reasons; viz (a) to pay for goods and NF services or (b) to repay loans taken in an earlier period.

•  Hence Financial Supply chains can be constructed recognizing the role of exchange of goods and time value of money.

•  Flow of funds can be directly constrained or indirectly restricted through constraints on flow of goods and NF services.

•  These Money flow constraints can arise out of legislation or market forces.

•  The flow restrictions can result in reduced quantum of flow or delayed flows.

•  Growth in money supply is centrally controlled.

•  Velocity of circulation can be significantly affected by developing the money supply markets.

GlobalFinancialSupplyChainModelThe notion of a Supply chain

Single Country Model

Supplier of Goods and NF Services

Buyer of Goods and NF Services

Money Supplier

Flow of Goods & Services

Money Flow

Current payment

Future payments

Federal Reserve Bank

Depositors Investors

Retail Bank

Investment Bank CDS

Model1.1

Model1.2

Retail Bank

Single Country Model : Notes

•  Three flow streams are identified ,viz (1) flow of Goods and Non Financial Services (2) Money Flow and (3) Collaterals Flow

•  A firm ( or a citizen) can be both a Buyer and a Supplier at different instances.

•  Retail Banks (including the Merchant Banks) are the Money Suppliers in Model 1.1

•  Depositors are both citizens and institutions seeking primarily safe custody of funds

•  Investors are both citizens and institutions seeking capital growth

•  CDS stands for Collateralized Debt Securities

•  Transactions between Retail Banks represent the Call Money transactions needed to meet SLR and CRR

•  Expansion of Money Supply emanates from the Federal Reserve Bank inputs to the system

Two Countries Model ( using same currency)

Country A Country B Money Flow (current)

Flow of Goods & NF Services

Money Flow (Future)

Flow of Titles to Physical Assets

Model2.1

Two Countries Model ( using same currency) : Notes

•  Trade imbalances can arise but are addressed by money flows in required direction

•  Money flows can occur independent of Trade

•  One country funds can be used to hold titles to assets in other country

Two Countries Model ( using different but hard currencies)

Country A Country B Money Flow (current)

Flow of Goods & NF Services

Money Flow (Future)

Flow of Titles to Physical Assets

Model2.2

Currency Exchange Market

Money Flow (current)

Money Flow (Future)

•  Trade imbalances can arise but are addressed by money flows in required direction

•  Money flows can occur independent of Trade

•  One country funds can be used to hold titles to assets in other country

•  Exchange rate setting mechanism can be either controlled or uncontrolled

•  Relative strength of economies of the countries impacts on the exchange rate

Two Countries Model ( using different but hard currencies): Notes

•  Model gets complicated in many ways

•  Country B ( with soft currency) may not be able to procure all the Goods and NF Services it seeks/needs.

•  Government of Country B has a major role in controlling the exchange rate. It further brings many import restrictions.

•  Sometimes through Development Grants, Aids and Loans obtained through a Development Bank/Entity of Country A, Country B can get access to hard currency to procure goods and NF Services from Country A

Two Countries Model ( using different One hard and the other soft currencies): Notes

GlobalFinancialSupplyChainModel

Parasuram Balasubramanian, Founder & CEO, Theme Work Analytics, Bangalore

& Entrepreneur in Residence at Purdue University, USA

balasubp@gmail.com

A Research Initiative of

Presented at the Enterprise Integration Consortium Industry Advisory Board Meeting PennState University USA Feb 6, 2009

Copyright belongs to Theme Work Analytics Pvt Ltd