T2S To Generate €33billion of Tier 1 Capital Savings For Eurozone Banks, New Research Finds

New research has estimated that Target-2 Securities (T2S) will reduce on average, 15% of financial institutions’ daily cash or credit consumption during peak settlement periods.

The survey, conducted by PwC on behalf of Clearstream, suggests that market participants are starting to consider the effects of a pooled cash account in T2S on their balance sheet, but are struggling to quantify the impact. The survey uses Clearstream’s customer’s cross-border settlement data to estimate the impact on their own liquidity requirements of using a single central bank cash account in T2S.

Transposing this to the broader settlement volume in the euro zone, it was calculated that under Basel III rules, the research found it could translate into €33billion of Tier 1 capital savings for all euro zone banks, or 11% of the shortfall estimated by the OECD using 2011 year end positions. The OECD estimates eurozone banks need Eu295 billion of Tier 1 capital to comply with the Basel 2 requirements.

T2S will considerably facilitate the mobility of collateral, the research also notes. Securities in all T2S markets are technically held on the same platform, and bookings within T2S can be executed in real time.

Commenting on the rationale behind the research, Philip Brown, head of client relations Europe & Americas and member of the executive board, Clearstream, says that it goes beyond the current emphasis on IT readiness of the market, politics of the framework and the cost for settlement of the new framework. “T2S is about a fundamental change in the way we do business in Europe,” he said. “We felt there was more benefit from this project and we felt the main benefits were not coming through. We talked to our customers and we had a sense there was more to it that than was being debated so we wanted to formalize those hypotheses in a piece of work which was very open ended and to go out to market and market practitioners with PwC – as an independent party, – who undertook a comprehensive qualitative study including through in-depth interviews with key market participants to help us reveal some hidden T2S benefits.”

Thorsten Gommel, partner at PwC in Germany, adds that there were in-depth qualitative interviews with EU domestic banks, broker dealers, global custodians and multi-local custodians who commented that there were wider savings to be had from the new settlement framework in terms of liquidity and capital, but that they struggled to quantify it. The in-depth interviews provided the basis for the validation of the hypotheses that there were wider T2S benefits than settlement cost savings. This was followed by a quantitative estimate of potential capital savings to be made in terms of the effects of the Basel III balances on market participants.

“Some of them are actively considering a single central bank cash account for the cash side of securities settlement under T2S. This would have netting effects and economic benefits in terms of liquidity savings, which could significantly help banks meet their collective estimated Eu295 billion capital shortfall,” says Thorsten Gommel.

Providing an example of the liquidity saving, Gommel says that if an institution has a single settlement account they can buy Italian securities and sell French securities within a single settlement bank context and they would not have to prefund the purchase as is currently the case with settlement running in different CSDs at different schedules on different platforms. In the current framework, an overnight credit facility is needed to fund purchase. The single settlement bank usage is expected to amount to savings of 15% of capital, extrapolated from intraday settlement data at Clearstream.

Finally, the research expects that T2S will considerably facilitate the mobility of collateral. Securities in all T2S markets are technically held on the same platform, and bookings within T2S can be executed in real time. This means that if a bank needs collateral in one market and that same bank only has the securities eligible for such collateral in another market, then only one T2S internal booking needs to be executed to transfer the corresponding securities to where they are needed. Today, with separate settlement systems being involved, this is a lengthy and expensive procedure.