A new study on collateral optimization finds that European banks could reduce their Basel III equity capital requirements by up to 20% – an equivalent of €40 billion – through efficient collateral optimization.
“Collateral optimization – the value chain of collateral: Liquidity, cost and capital perspectives” was sponsored by Clearstream and was carried out by Luxembourg consultancy Elton Pickford. According to the study, collateral optimization is best achieved through a “collateral value chain”, that is, a succession of processing steps, which will ensure the availability and liquidity of a security. According to the Basel III and Dodd Frank regulations, banks are required to increase their levels of equity to strengthen their solvency in case of crisis.
Regulators also demand a greater protection of banks against a liquidity crisis by setting aside good quality liquid assets that can be sold quickly for cash.
Effective collateral management and optimisation is paramount to fulfil objectives of prudential liquidity management, regulatory compliance and profitability that are common to all business model, says the study.
The survey-based study consisted of a qualitative and quantitative analysis interviews of 22 financial institutions in the first quarter of 2014. This sample represents around 20% of the European banking balance sheet, i.e., €6.5 trillion of the total €30.8 trillion and includes eight of the top 30 major financial institutions the European Central Bank considers to be “systemic”.
Pascal Morosini, global head of global securities financing sales and relationship management at Clearstream says: “We see the business models of our customers evolving post crisis, with new actors in our Global Liquidity Hub. We wanted to understand the benefits the hub could offer them given the regulatory impact on their balance sheets”.
“As a result of those regulatory requirements and deleveraging, we saw a contraction of repo trading and at the same time massive request for high quality liquid assets. There is a bit of transformation out there, we knew our business would be under dramatic change but you can see how it is different from before.
Morosini points to the European Banking Association report on Basel III monitoring exercise, which reveals that the full Basel III implementation would require European banks to increase their balance sheets by roughly €200 billion.
“With the setup of a collateral value chain combined with collateral optimisation, Europeans Banks could achieve savings of up to €40 billion in equity capital, according the Elton Pickford study.
Commenting further on the value chain, Morisini notes the differences in internal models with different operational, funding, prudential and regulatory constraints. “Establishing a collateral value chain is a strategic choice for survival“. Institutions shall make sure that they implement several steps in order to select securities, ensure their availability and mobility as well as establishing a robust liquidation process,” he adds.
New Study Reveals Impact of Collateral Optimization on Banks’ Balance Sheets
A new study on collateral optimization finds that European banks could reduce their Basel III equity capital requirements by up to 20% – an equivalent of €40 billion – through efficient collateral optimization.
« Deutsche Bank Replaces Citi as Depositary Bank and TA for Unilever