Centralized Limits and Collateral Management

In their quest for excellence corporate banks have adopted best of breed solutions for each line of business. Therefore the trade finance team would have selected the best Trade Finance Solution, the Loan Syndication Team would have another solution and the working capital / term loans / project finance teams would again have separate solutions.   This approach clearly improves the efficiency and product offering from a relationship manager perspective. The corporate customers are also happy because they are able to get the product variants that they desire.

However, there are three not so positive consequences of the above approach ( viz.” best of breed solution for each line of business”). First a 360 degree view of the client has become a challenge. Second, the ability to cross sell, up sell or offer relationship pricing is limited as each product team operates in silos. Third and most important is that the business lacks a 360 degree view of the client positions, risks, limits and collateral. This is because the limit facilities and collateral are embedded in the independent product processors and the credit risk processes in most banks are a little fragmented and distributed.

In this age of increased regulatory scrutiny and tremendous focus on risk management and loss mitigation, it is becoming imperative for banks to have a real time 360 degree  view of the clients’ limits and collaterals.  As corporates expand across borders the limit structures can get further complex and it becomes all the more difficult to track exposures centrally. Even for banks with a single country presence, tracking exposure to multiple subsidiaries and multiple products can get quite involved.To be able to manage such limit structures a centralized limits and collateral engine is essential. This would offer the banks the following benefits:

BUSINESS

1. Instead of islands of collateral and lines in each system, a single system with all collateral and limits will allow the bank to better control its exposure at a bank level
2. By earmarking the same collateral to multiple limit lines, banks will be able to do more secured lending thereby reducing risk capital / capital adequacy requirements. This also leads to higher ROCE (Return on capital employed) for the bank.
3. Corporate clients will also be benefited as they would be able to borrow more based on the existing collateral that they have pledged with the bank. ( as it is no longer lying idle in some isolated / standalone system )

OPERATIONS

1. Operational efficiency will be enhanced as all facility creation and limit sanctioning / approval processes can be centralized in a single system.
2. Early warnings and real time update of information reduces operational risk

TECHNOLOGY

1. From a technology / architecture viewpoint a centralized limits & collateral system will readily lend itself to a SOA architecture and reduce the number of point to point interfaces and reduce integration complexity.

Such an architecture allows banks to get multi-dimensional real time information on exposure by currency, country, sector, counterparty, product etc.  Centralized collateral revaluation based on fluctuating exchange rates and market prices will enable banks to dynamically track risk from a single system rather than from multiple systems.  From a corporate customer perspective, collateral pooling and sharing across related parties and subsidiaries would unlock borrowing potential and drive investment and growth in the economy.

Analysts forecast spending on Risk IT to reach $87b by 2018 and will be approximately 18% of IT budgets. Investment in a centralized limits and collateral management system has a very strong business case based on both cost reduction and new business for the bank. Indeed a few global tier 1 banks have already implemented such systems. Many banks are likely to follow suit. From a pure risk control perspective as well, an enterprise wide limits & collateral management system is becoming a sine-qua-non for banks today.