MADRID: MANAGEMENT MODEL FOR FINANCIAL INSTITUTIONS Proposal for the location of financial activities in Madrid and for the international provision of financial technology services

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MADRID MANAGEMENT MODEL FOR FINANCIAL
INSTITUTIONSProposal for the location of
financial activities in Madrid and for the
international provision of financial technology
services
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INDEX

• 1. Market research (KPMG) 1
• 2. Efficiency / Value Chain (Deloitte)
  8
• 3. Innovation (PWC) 13
• 4. Technology and Infrastructure (Cap Gemini)
  ...20
• 5. CONCLUSION Comprehensive SWOT Analysis25

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Market research

• KPMG has prepared a market research as part of
  the technology and innovation working group. The
  work has consisted primarily of an analysis of
  key market indicators and the related value chain
  to extract the success factors of the Spanish
  market.
• The study is part of the main tasks to be
  performed for the strategic diagnosis of the
  Financial Center in Madrid and will outline the
  strategy that best suits its capabilities.
• An important financial centre is identified by
  its ability to attract funds towards the
  different markets located within it.

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Market researchRegulation, supervision and risk
management

• Madrid is the financial capital of Spain and is
  the Financial Centre where most of the activity
  of the Spanish market is focused.
• One of the great strengths of the Spanish market
  is confidence.
• Trust is a rising variable, especially today as a
  result of current events in the markets.
• Regulating and supervising bodies play a key role
  in ensuring the security of the financial market,
  risk management in financial institutions having
  become particularly relevant.
• The establishment of risk management systems
  integrated into the culture of organizations, in
  addition to complying with regulation, help
  ensure that companies are better run, more
  transparent and therefore more attractive to
  investors.
• Asking shareholders to support companies that
  take risks and embark on projects with long-term
  return requires trust. The Spanish market
  provides confidence to its agents and emphasizes
  the solidity of its financial institutions.

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Market researchRegulation, supervision and risk
management (cont)

• The tasks of regulation and supervision by the
  Bank of Spain have helped consolidate the Spanish
  financial system.
• Specifically, the Spanish monitoring system has
  proven to be effective, in both the
  interpretation and adjustment of international
  regulations, notable for having applied a
  pragmatic approach that has made the adoption of
  these standards by the Spanish authorities much
  less traumatic and more homogeneous than in the
  experience of other european institutions.
• Likewise, the prudential supervision performed by
  the Bank of Spain has allowed our financial
  institutions to cope with the current crisis and
  has been recognized both nationally and
  internationally.
• The Bank of Spain has also stood out as a pioneer
  in introducing measures to mitigate
  procyclicality, with wide and deserved
  recognition of its experience in implementing
  advanced models of risk management and solvency
  in the context of Basel II.
• The Bank of Spain model combines regulatory and
  supervisory tasks in a single body, resulting in
  a competitive advantage over other financial
  markets..

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Market researchRelevant aspects
KPMG has identified 16 key success factors in the
markets

Market resilience Security Perception Liquidity Technology Customer needs Wealth movement Efficiency

Risk Management Capital requirements Regulator Financing and credit needs Real estate management Interest rate and exchange rate tensions Knowledge management and innovation Other environment variables

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Market researchOther relevant aspects
Given the current crisis in the markets, a critical factor in the success of the Madrid Financial Centre is its resilience and ability to recover. Spain has the advantage of having a strong banking model, based on customer-centered retail operations, based on the attraction of savings to loan it to families and businesses, which allows it to have a solid deposit and capital base and a diversified business. While it is true that an adjustment in our financial system is pending, no changes are expected to the model itself. Recovery will depend largely on proper risk and real estate asset management, on the capitalization of our financial institutions and enterprises, on the strains of interest rates and exchange rates, and on the restoration of the credit and the financing system. The Spanish stock market is recognized as one of the most secure, providing maximum security and transparency and ensuring for investors the existence of the securities that are bought or sold and of the money at stake. It is vital to enhance measures which increase liquidity in the system and which increase the offer of listed shares and trading in products offered both in the equity and debt markets. The good Spanish market response to this crisis must be used to strengthen the image and reputation of our financial system and create a brand. It is important to design and implement a marketing plan to raise the actual position of the Madrid Financial centre and increase the attractiveness of the region to market players.

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Market researchRelevant aspects
The technological resources of the major financial institutions in the Madrid Financial Center are good and are its stronghold. One of the critical threats to the financial market is the emergence of competing centres with more advanced, more secure, faster technology, with better connectivity. It is therefore recommendable to develop new technological developments and investment in specialized technology, strategic alliances within the market players as well as technology and communication systems suppliers, in order to improve the efficiency of productivity and market competitiveness. The market environment is constantly changing and increasingly competitive assuming one of the critical risks that of not having an innovative offer tailored to customer needs. It is important to make a thorough study on the needs of customers and different market players, their profiles and new products demanded, so there is a match between supply and demand to provide a differential value to the Madrid Financial Centre. Financial markets move in an increasingly competitive environment resulting in greater mobility of capital, more active participation of local markets and increased competition in different geographical areas. Therefore, one of the greatest threats to the financial markets of Madrid is the shifting of pockets of wealth to other, more attractive, places. It is advisable to know where the masses of wealth are displaced to and the differential characteristics of the receiving centres.

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Market researchConclusion
Our financial institutions have stood out for having efficient models assuming a competitive advantage, but improvements still have to be made through investments in technology and innovation, changes in organizational models and increased productivity. Spain has the advantage of having major financial institutions of international prestige which have been noted for the excellent management of new businesses, the proper management of synergies and integration process and whose headquarters are in Madrid. The brand image they have created is a stronghold for the Madrid Financial Centre. Madrid drives the Spanish economy and has plans for major investments in infrastructure and communications that will help in the positioning of the Madrid Financial Centre and which must be promoted. It is very important to have incentives and tax measures to encourage domestic and foreign investment in the financial markets of Madrid. In Spain we face a crisis but not a shift in the banking business model and this gives us an advantage we must exploit. One of the major challenges faced by the Madrid Financial Centre is the ability to adapt to the changing environment and particularly to the current crisis. Anticipation of the changing environment is a key to the success of any strategy and therefore the management of expectations is vital. We recommend continuous monitoring of the main key success factors and implementation of an action plan to enhance competitive advantages in line with the strategic objectives of Madrid International Financial Centre.

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Efficiency

• Spanish financial institutions are leading the
  global benchmark for efficiency ranking in the
  sector.
• Madrid has an optimal response to the operational
  requirements of the value chain of any financial
  activity, both for the front and back office.
• DELOITTE has analyzed the value chain of various
  business and financial activities, showing the
  differential values of Madrid compared to other
  locations.

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Analysis of the Value ChainPerspectives

• The value proposition Madrid can provide as a
  possible recipient of the activities contained in
  the value chain of the financial sector has been
  analysed, so that competitive advantages can be
  extrapolated from the region as it intends to
  establish itself as a center of international
  reference.

• The conclusion is that Madrid can provide a clear
  differential value in the execution of certain
  activities in the value chain.

• Two perspectives considered in the analysis

• Local Perspective Analysis of the competitive
  advantages gained by an entity established in
  Madrid for business and leveraging of the
  existing local market.
• Global Perspective Analysis of the competitive
  advantages which and entity would obtain by
  centralizing certain administrative and support
  processes in Madrid, with the aim of providing
  these services to its entire multinational
  structure. In this case, the business entity
  would be local or global, although run
  (supported), in whole or in part, from Madrid.

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Analysis of the Value ChainPerspectives

• From the Local Perspective of the analysis, the
  activities in which Madrid can provide greater
  value are the following
• Those requiring appropriately skilled human
  resources. Madrid provides access to qualified
  human resources in implementing various stages of
  the value chain.
• Access is needed to specialized suppliers and of
  a certain standard. Madrid provides adequate
  access to the various suppliers necessary for the
  conduct of various defined tasks, with varying
  degrees of expertise and experience in the
  industry.
• The aim is to exploit the local market. Madrid is
  presented to financial institutions as an
  attractive market, according to the analysis, as
  one of the major poles of development at a
  national and European level and also as an
  excellent entry point to other markets such as
  Latin America and the Mediterranean basin.
• Access is desired to more competitive costs for
  resource-intensive tasks. Compared with other
  countries in their socio-economic environment,
  Spain, in general, is more cost competitive,
  which directly implies lower operating costs and
  increased profit.

• In this respect, the activities where Madrid
  provides more value are
• Study of customer needs,
• Technology,
• Administrative Management,
• Multichannel Distribution,
• Risk Management and
• Customer Service.

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Analysis of the Value ChainPerspectives

• For the Global Outlook of the analysis conducted
  in relation to the provision of differential
  value by Madrid in the execution of tasks defined
  in the value chain presented, one can conclude
  that this value is larger and more spread in
  relation to other financial centers in conducting
  tasks that require
• Access to skilled human resources and expertise
  in the implementation of various activities of
  the value chain, such as technological support
  functions and administrative activities.
• Access to specialized providers. Madrid offers
  providers nationally and globally for the tasks
  defined in the value chain.
• Access to competitive costs, compared to
  surrounding countries. This factor, present in
  all the activities in Madrid, will be more
  decisive the more intensive the activity is in
  the use of the Region's own resources, such as
  human resources or office space.

• Thus, the activities in which Madrid will provide
  more value are Technology and Administrative
  Management.
• Additionally, Madrid offers its successful
  experience to other activities of the value
  chain, with examples of international reference
  on banking and insurance that can be exportable
  to other markets.

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Analysis of the Value ChainComprehensive SWOT

• Strengths

• Opportunities

• Madrid offers a wide range of highly qualified
  human resources.
• Access to suitable suppliers and experience in
  most of the activities of the value chain.
• More cost competitive than other financial
  centers, which directly implies lower operating
  costs and increased profit.
• Proliferation of technology parks and clusters
  with a high level of expertise and development.
• Madrid is known as one of the cities with the
  best quality of life.

• Establishment of Madrid as a financial center of
  reference for Latin America.
• Establishment of Madrid as a hub of support
  activity for Europe.
• The current economic climate will cause the
  concentration of the financial industry, so that
  Madrid can be positioned as the recipient of
  these concentrations in some or all stages of the
  value chain..
• Ostensible improvement in the perception of the
  Spanish financial system and its regulators at an
  international level.

Weaknesses
Threats

• Local orientation of both human resources and
  suppliers.
• Knowledge of English among the general
  population.
• Lack of labor market flexibility is seen by
  companies as a serious problem to solve,
  especially in relation to the cost of redundancy.
• Excessive bureaucratic processes of business
  establishment and start-ups.
• Lower level of investment grants than other parts
  in Spain.
• Within Spain, Madrid is one of the most
  expensive socio-economic areas.
• Spain appears on the last positions of the
  productivity rankings among the neighboring
  countries.

• The existence of other European financial centers
  such as Paris or Frankfurt and even in some
  emerging countries attractive for their low cost.
• Latin American financial centers are evolving
  such as Chile, Panama and Brazil that can take on
  the role of bridge for access to the Latin
  American market and oust Madrid from its current
  position.
• The advantage based on "lower cost" may not be
  sustainable.
• Forecasts indicate that Spain will undergo, like
  most developing countries, a shortage of highly
  skilled human resources.

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Innovation

• Madrid is the center of innovation in many
  economic, social and business activities.
• On the financial front this is clearly reflected
  in the global leadership of our financial
  institutions in the development of products and
  services, the introduction of new models of
  customer service, the use of new distribution
  channels and access to customers and markets, the
  use of models for risk management and, of course,
  the innovative use of information technology and
  communication.
• PricewaterhouseCoopers has assessed the
  capabilities that Madrid offers the financial
  world for innovation in its strategic positioning
  in the development of products and services.

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Innovation Excellence in innovation is not the
result of chance or good intentions

• The innovativeness of a financial center is
  supported by a set of variables (of the
  environment or specific to the financial sector)

Environmental and Demographic Variables
Sector and Market Variables

• Level of internal competence
• Size of financial entities
• Level of internationalization
• Level of technological development
• Level of profitability
• Experience of regulating bodies

• Population size and critical mass
• Access to qualified human capital
• Level of language use
• Cost of living
• Quality of life
• Level of job satisfaction
• Level of infrastructures
• Systemic economies of scale
• Orientation of the environment to RD
• Existence of RD centres

Variables analysed in this presentation

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Inovation Contributing factors 1. Access to
qualified human capital

• Three schools in Madrid (IE, IESE, ESADE) are
  among the best in all international rankings
  (Source FT, Business Week, Wall Street Journal.
  January 2009).
• In Madrid, numerous graduate studies specializing
  in finance are taught
  (eg Master in Banking and
  Finance in CEF, Master of Quantitative Finance at
  CIFF, Master in Management of Financial
  Institutions in IEB).
• Madrid, with 43,246 people, is among the leading
  regions in terms of number of researchers
  (Source Eurostat. Total R D personnel by
  sectors of performance (employment) and region.
  2006)
• Madrid is the 3rd most important region in Europe
  according to the number of professionals employed
  in high tech sectors (Source Eurostat. "Regional
  employment in high technology sectors." 2007).
• Madrid is the fifth most important city in
  quality of life, making it easier to attract
  skilled human capital (Source IDF Magazine
  "European Cities and Regions of the Future
  2008/09").

Madrid is an ideal environment for access to
highly qualified human capital, the driving force
of innovation strategies

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Innovation Contributing factors 2. Favourable
environment for RD (1)

• Madrid, with 1.96, is the region that invests
  more in R D relative to GDP (Source INE 2007).
• There are numerous public initiatives to support
  innovation
• Plan Avanza 2 financed by the Central Government
  and the Madrid Region
• Business Innovation Plan implemented by IMADE
• In Madrid, there is an extensive network of
  scientific and technological parks and has been
  chosen as headquarters for many multinational
  companies for their R D centers of excellence
  (Source Interes Invest 2007).
• An additional attraction of Madrid compared to
  other places is the favorable international tax
  treatment of R D.

From the perspective of the performance of
government, Madrid is an ideal framework for the
development of R D

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Innovation Contributing factors 2. Favourable
environment for RD (2)

• The high technological development of Spanish
  financial entities has been a catalyst for
  creating an environment conducive to R D.
• The intensive use of technology has enabled
  Spanish financial institutions to be leaders in
• Use of compensation systems for electronic
  processing of cheques, transfers, receipts, etc.
• Data integration to support the advanced
  management activities of clients.
• Development of models of transactional
  integration for the automation of back office
  processes.
• Development of advanced models for risk
  management.
• Implementation of multichannel management
  strategies.

The development of financial institutions
complements the action of Public Administration
to create a suitable environment for RD.

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Innovation Contributing factors 3. Existence of
systemic economies of scale and the
internationalization of financial institutions

• The Madrid Region has the largest concentration
  of business in Spain (500,000 active
  enterprises).
• Most large international companies in Spain (60)
  are headquartered in Madrid
  (Source Forbes-The Global 2000.
  2009).
• Several Spanish financial institutions with
  headquarters in Madrid have an international
  scope with a competitive presence in the banking
  and insurance markets in Europe and Latin
  America.
• Madrid is the decision-making center of two
  financial institutions among the world's top 30
  institutions by asset size, also among the top 10
  for profit.. (Source Bankers-Almanac 2008).

The innovative capacity of Madrid benefits from a
developed business fabric and the size and level
of internationalization of financial
institutions, which encourages competition and
allows the incorporation of knowledge and
innovations from other sectors and markets.

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Innovation
Conclusion

• The Spanish financial sector, especially in
  retail banking, shows high levels of innovation
  in different fields product, process,
  organization and marketing innovation.
• This innovation is based on a combination of
  factors including the access to skilled human
  capital, the orientation of the environment for
  innovation, systemic economies of scale as well
  as size and level of internationalization of
  financial institutions.
• Additionally there are several levers that have
  enhanced the innovation capabilities of financial
  institutions
• Technological developments
• The sophistication of customers
• Increased competitiveness
• Changes in regulation
• In summary, Madrid meets the required skills to
  be an international financial center in the
  generation of financial products and services.

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Technology and Infrastructures

• Capgemini has examined the extent to which
  technology is a differential driver for Spanish
  financial institutions and how Madrid provides
  resources, skills and technological
  infrastructure that place it in a position for
  global leadership.

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Technology and InfrastructuresSpanish financial
institutions have been internationally
recognized as models of success
ACKNOWLEDGEMENT
"Boosting the generation of results through a
constant evolution of customer relationships and
a strong orientation towards cost efficiency"
European Leader in cost to income ratio 2004-06
"New dynamic of profitable growth and value
creation with a very strong business with
innovation as a lever for growth"
Global presence and growth leveraged on a common
platform that improves short-term operational
efficiency"
"Model relationship with specific segments of
customers leveraged on a multi-channel
relationship strategy"
Specific Trade Policies for customer segments,
offering expertise and personalized customer
profiles for guidance"
Technology awards New channels 2007
"International expansion driven by
standardization of best practices on a common
operating platform"
Automotive Insurance Solutions Provider Award
Latibex entry gate to Latin America and
European and American equity market bridge".
Diversification of products and services,
innovation and internationalization anticipating
future competition "
Technology has been a key impetus for the
realization of business strategy

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This business strategy has been realized in a
model of management of the financial business
where technology has driven efficiency along the
value chain
Value Chain of the Financial Sector
Internal knowledge management
Knowledge of the customer
Experience of the customer
Operational efficiency
Risk management
Regulation and Supervision
Financial institutions in Spain are examples of
how technology applied to business generates
tangible results

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Technology and InfrastructuresMadrid has become
the hub of knowledge and experience in the
financial sector

• Locate in Madrid high-value financial
  activities
• Business Process Outsourcing
• Centralized areas of technology development
• Develop solutions and technologies for regulatory
  compliance
• Development and maintenance of solutions and
  technologies applied to industry
• Specialized R D
• Exportar el conocimiento experto y mejores
• practices
• Development of Madrid as a consultancy hub for
  specialized processes and technology in the
  sector
• Promote a software development cluster for the
  financial business management
• Establish business models co-leveraged on shared
  experience and knowledge gathered

Madrids opportunity is to exploit and capitalize
on these capabilities

• Cluster specialized in the financial sector
• Presence of entities, suppliers, regulators and
  "market makers" (BME)
• Specialized human resources
• Experience in technology projects of high value
• Applied Innovation Hub
• Excellent infrastructure for multichanneling

By offering value focused on

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Technology and InfrastructuresComprehensive SWOT
Strengths
Opportunities

• Improve the acknowledgement that technology has
  contributed to the growth strategy of financial
  institutions in Spain
• Make better known the current capacities for
  which Madrid is a financial "cluster"
  specialized in retail banking
• High capacity to attract multilingual talent to
  Madrid
• Positioning Madrid as a financial reference and
  exporter of best practices to Latin America
• Synergies with other established financial
  centers in the world

• Successful model of Spanish financial
  institutions making the value of technology apply
  to business
• Wide network of service companies with high
  expertise in the sector, without technological
  dependence
• Proposal for competitive costs and high capacity
  to generate synergies in Spain and Latin America
• Communications infrastructure network with such a
  strong world-recognized partner as Telefónica
• Sample surveys in times of reflection on the
  future of regulation

Weaknesses
Threats

• Increasing recognition of Madrid as a specialized
  technological center
• Promote the systematization of technological
  know-how
• Improve learning English as a communication tool
  at work
• Encourage the development and marketing of
  specific solutions in the financial sector
• Facilitate administrative processes and aid
  management for R D
• Develop the presence of Spanish entities in
  other, non-retail financial sectors

• Countries such as India, Chile, Brazil or Panama,
  are a threat to Spain at the level of
  technological expertise and development costs
• International financial centers directly manage
  their relocation models without considering
  Madrid as a manager in this process
• A value proposition based solely on costs is not
  sustainable in the long term
• Mexico, Brazil, Chile, etc. are being
  consolidated as centers of support for financial
  markets in the U.S., Spain and Portugal
• Difficulty of building sustainable barriers to
  entry in time

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CONCLUSIONS Comprehensive SWOT Analysis (part I)
STRENGTHS OPPORTUNITIES
Good image of our financial institutions with good management of market liquidity and no excessive debt Business model established on a solid base of deposits and diversified business Banking without toxic products, non-Spanish market loans not considered of poor quality Madrid offers a wide range of highly qualified human resources Access to suppliers and experience in most of the activities of the value chain without technological dependence Proliferation of technology parks and clusters with a high level of expertise and development Successful model of Spanish financial institutions to make the value of technology applied to business Proposal for competitive costs and high synergy generation capacity in Spain and Latin America Communications infrastructure network with such a strong, internationally recognised partner as Telefónica Recognised supervision model in times of reflection on the future of regulation Madrid is known as one of the cities with the highest quality of life Safer centre compared to other surrounding and emerging countries Success depends on the ability to attract additional groups of wealth compared with the lack of security in other markets Madrid to be established as a financial centre of reference for Latin America Establishment of Madrid as a hub of support activities for Europe The current economic climate will cause the concentration of the financial industry, so that Madrid can be positioned as the recipient of these concentrations in some or all stages of the value chain. This adjustment is an opportunity to improve system efficiency. Ostensible improvement in the perception of the Spanish financial system and its regulators at the international level, because of the solvency and prudential regulation that they show respectively Improve the recognition that technology has contributed to the growth strategy of financial institutions in Spain Publicising the current capacities of Madrid as a Financial "cluster" specialized in retail banking High capacity to attract multilingual talent to Madrid Synergies with other established financial centers in the world

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CONCLUSIONS Comprehensive SWOT Analysis (part II)
WEAKNESSES THREATS
Increase the recognition of Madrid as a specialized technological center Promote the systematization of technological know-how Ratings under review for the majority of the entities of the financial system Excess real estate assets held by financial institutions in Spain Local orientation of both human resources and suppliers Improve learning English as a communication tool at work Encourage the development and marketing of specific solutions in the financial sector Lack of labour market flexibility is seen by companies as a serious problem to solve, especially in relation to redundancy costs Excessive bureaucratic processes in business establishment and start-ups Credit needs in the market Excessive leverage and potential capital needs by some entities. The existence of other European financial centres such as Paris or Frankfurt highly technological and highly competitive like Madrid in cost advantages The value proposition based solely on costs is not sustainable in the long term International financial centres manage their relocation models directly without Madrid as a manager of this process Latin American financial centers are evolving, such as Chile, Panama and Brazil, which can provide access to the Latin American market and oust Madrid from its current position. Mexico, Brazil, Chile, are being consolidated as centers of support for financial markets in the U.S., Spain and Portugal. Advantage based on "lower cost" may not be sustainable over time Forecasts indicate that Spain will undergo, like most developing countries, a shortage of highly skilled human resources More favorable tax policies in other countries System of R D subsidies need improvement Difficulty of building sustainable entry barriers in time

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