European banks could reduce their Basel III equity capital requirements by up to 20%, or around €40bn ($55bn), through efficient collateral optimisation, according to a Clearstream-sponsored Elton-Pickford study.
Collateral Optimisation, The value chain of collateral: liquidity, cost and capital perspectives finds that collateral optimisation is best achieved through a “collateral value chain”, which makes it possible to select securities, to ensure their availability and mobility as well as the robustness of the liquidation process.
“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,” said Stefan Lepp, executive board member at Clearstream.
Banks are still deciding how to meet required levels of equity under Dodd-Frank and Basel III to strengthen their solvency in case of crisis. The study describes the flows in collateral liquidity as “truly chaotic”, reflecting strategic choices still being considered by internal experts.
It attributed this disorder to several factors including regulation acting as a development driver, repricing of credit risk, impact of monetary policies such as quantitative easing, and quasi-deflation or “low-flation”.
The survey, which consisted of a qualitative and quantitative analysis of interviews iwth
22 institutions including banks in Q1 2014, recommended optimisation as a source of savings, potential profitability and a primary lever that could be used to meet ever increasing capital equity and liquidity needs.
“Whatever the business model, optimisation of collateral management should take a structured approach and implement a collateral value chain, aimed at fulfilling the following three objectives: prudential liquidity management, regulatory compliance and profitability,” the study said.
“A centralised view of collateral, associated with local liquidation rules seems to be the best management model to face this new fragmented environment.”