• Study reveals that “collateral value chain” would allow banks to reduce their Basel III equity capital requirements by up to 20 percent or EUR 40 billion
• Study defines “collateral value chain” as a succession of sequential steps that make it possible to select securities, ensure their availability and the robustness of the liquidation process
• Study is based on qualitative and quantitative survey by Elton-Pickford of 22 institutions incl. banks which the European Central Bank considers eight as “systemic”
The new study “Collateral optimisation – the value chain of collateral: Liquidity, cost and capital perspectives” by Clearstream and Elton-Pickford finds that European banks could reduce their Basel III equity capital requirements by up to 20 percent – an equivalent of EUR 40 billion – through efficient collateral optimisation.
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. The assets are weighted as a function of their risk to assess the impact on the balance sheet and to adjust the necessary quantity of equity. Banks are therefore striving to hold as much high quality liquid assets as possible to reduce the amount of required equity.
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. According to the study, the challenge here is to make the right selection of “liquid” assets and to put in place necessary contracts and the procedures for selling these assets for cash.
Collateral management and collateral optimisation are the appropriate tools for both banks and the buyside for maximising the use of these securities and the Clearstream/Elton-Pickford study confirms that collateral optimisation is currently a prioritiy for major European participants in financial markets.
According to the study, collateral optimisation 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. Clearstream’s Global Liquidity Hub maximises the effective use of collateral and offers both financial institutions and the buyside services covering the full collateral value chain.
Stéphane Panzani, Managing Director at Elton-Pickford, said: “During the interviews we held with various financial institutions, the market need for a collateral value chain became clear. Clearstream’s Global Liquidity Hub has emerged as one of the most efficient systems for improving this collateral efficiency. By applying this concept, financial institutions could benefit from significant cost savings of up to EUR 40 billion in Basel III equity capital savings.”
Stefan Lepp, Clearstream executive board member in charge of Global Securities Financing, commented: “The Elton-Pickford study confirms the already widely discussed savings potential through optimal collateral management; but the concept of building a ‘collateral value chain’ is new. Our Global Liquidity Hub offers services which effectively already provide customers with access to High Quality Liquid Assets (HQLA) through a collateral value chain and helps them make the most of their assets.”
The survey consisted of a qualitative and quantitative analysis interviews of 22 institutions incl. banks in the first quarter of 2014. This sample represents around 20 percent of the European banking balance sheet, i.e., EUR 6.5 trillion of the total EUR 30.8 trillion and includes eight of the top 30 major financial institutions the European Central Bank considers to be “systemic”.
