Tom Osborn, Financial News
14 Sep 2011
The global banking industry is wasting €4bn a year through inefficient use of collateral assets, according to an industry survey, at a time when banks are struggling to meet higher capital requirements and keep funding costs down.
In a report on bank collateral use, Accenture, the global consulting firm, found that as much as 15% of the available collateral on a bank’s books is not being used when its posts margin, mainly due to assets such as bonds being spread across different trading divisions.
Collateral is posted against a trade as a form of insurance should one party default, a process known as margining. Accepted collateral usually consists of liquid, highly-rated instruments, such as AAA government bonds.
Accenture conducted interviews with around 30 bank executives when writing the report, as well as looking at public data on trade volumes and revenues from banks’ FICC divisions. The study was commissioned by Clearstream, the securities depository owned by German exchange-operator Deutsche Börse.
The biggest headache many dealers face is a split in collateral pools, the report said. As a result, bank departments are forced to maintain excess amounts of collateral, leaving them unable to maximise liquidity and keep down financing costs. Collateral inefficiencies also lead to higher staff and IT costs, the report said.
The issue of collateral management has taken on a new impetus post-crisis, with regulatory changes to the global banking industry forcing dealers to post higher rates of margin when trading derivatives products.
Basel III capitalisation requirements will also force banks to hold more capital on their books, as a buffer against losses. Dealers estimate that a further $2 trillion in quality collateral could be required to comply with new regulatory demands, raising fears of so-called collateral crunch due to a lack of available assets.
The report recommends dealers implement a single IT system for collateral management across all business lines, which would allow a complete overview of available assets. Some elements of collateral management could also be automated more efficiently through the use of algorithms, it added.
The report also raises the idea of a “liquidity czar”, a figure who would oversee a bank’s collateral requirements across all capital markets, able to see where collateral is being used inefficiently.
Owen Jelf, managing director of Accenture’s core trading and settlement services team, said: “One way banks can improve their return on equity is by addressing their collateral management requirements and capabilities. Many banks who haven’t sufficiently focused on improving collateral management capabilities are waking up to its importance in the present climate.”
Stefan Lepp, head of global securities financing at Clearstream, said: “Maximising the value of collateral has never been more important. This requires global banks to be able to see and manage all of their collateral holdings centrally – across business lines and geographies. It also requires comprehensive data and the ability to exchange information quickly and efficiently with counterparties. A key strategy to address the new wave of financial regulations is to reduce internal fragmentation and free up collateral.”
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The original article is here.