By now, most interested parties have seen the headline from Clearstream and PricewaterhouseCoopers’s new report on T2S: banks could save €33 billion of Tier 1 capital savings, or 11% of what they are estimated to still need. We found some interesting technicalities that add to the story.
The way that Clearstream and PwC came to their figures is a calculation of moving uncommitted credit facilities to committed credit facilities and efficiencies in T2S settlement, thus reducing the need for the commitment:
Step 1: “Today, settlement providers often provide uncommitted credit facilities to support their customers’ settlement funding.”
Step 2: Under Basel III’s Net Stable Funding Ratio (NSFR), uncommitted credit facilities can no longer be part of reported liquidity. These uncommitted credit facilities have to be committed (fixed).
Step 3: Valuing committed credit lines is expensive and these lines must be backed by Tier 1 capital.
Step 4: T2S reduces the need for committed credit lines due to settlement efficiencies.
Step 5: the less that lenders need to provide committed credit lines due to settlement efficiencies, the lower their need for Tier 1 capital.
It’s a nifty argument and one that we buy. In prior conversations on T2S, we concluded that there were indeed substantial efficiencies to be gained from the elimination of multiple asset movements and intermediaries. The Clearstream/PwC report picked up on this too when talking about collateral requirements:
“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.”
Not to mention eliminating a vast range of subcustodians from the custody process.
We noted one other thing is the Clearstream/PwC study that was of interest: the use of internal settlement data to reach their conclusions:
“Clearstream SA used their own customer cross-border settlement data to estimate the impact on their own liquidity requirements of using a single central bank cash account in T2S, and deduced that it will reduce, on average, 15% of their daily cash or credit consumption during peak settlement periods (usually the overnight cycle).”
This methodology reminds us of Northern Trust’s recent analysis of their pension plan clients’ collateral for use in OTC derivatives transactions. Large custodial and transactions databases are powerful tools for understanding future market trends.
A link to the Clearstream/PwC paper, “The 300-billion-euro Question Survey on the Benefits of TARGET2-Securities,” is here.