The financial services sector could save more than €4 billion annually in collateral management costs by addressing operational inefficiencies, according to a survey by Accenture and Clearstream.
The research, which was based on publicly available information, together with interviews with 31 executives at 16 global banks, found that decentralized operations and unaligned business objectives are limiting banks' ability to manage collateral efficiently. As a result, banks are unable to maximize liquidity, keep down financing costs and are forced to maintain excess collateral buffers. These inefficiencies cost the financial sector more than €4 billion annually, according to the research.
Banks use collateral mainly for secured funding from markets and central banks. It is key enabler of a variety of services and products, including traditional securities financing and the facilitation of trading and risk mitigation. Collateral management has become a critical industry issue as regulators set more rigorous capital and liquidity standards and banks confront new cost and growth challenges in the wake of the global financial crisis. Efficient collateral management can free up liquidity for banks, enabling them to offer a greater range of products and services and more readily meet these new regulatory requirements. Accenture estimates the total value of cash and securities used as collateral in the financial system globally to be more than €12 trillion.
Stefan Lepp, Member of the Executive Board and Head of Global Securities Financing at Clearstream, said: "In today's environment of regulators looking to safeguard the financial services sector by addressing more rigorous capital and liquidity standards through regulation, combined with reduced appetite for unsecured credit lending, maximizing 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."
Owen Jelf, Managing Director, Accenture Core Trading and Settlement Services, said: "The majority of our survey respondents agreed that streamlining internal processes and governance and enhancing the visibility of collateral are value-creation opportunities. Our research makes clear that not only can the banking industry save €4 billion annually through better collateral management, but it has a precious opportunity to increase revenues and profitability by getting this function right."
According to the survey, a significant number of banks have focused on increasing collateral management efficiencies following the recent financial crisis. More than one-third of respondents said their companies have reduced internal collateral management inefficiencies over the past three years; nearly one-quarter said they had reduced external collateral management costs.
According to the survey, banks' key collateral management challenges include:
- An incomplete view of all collateral and an inability to manage holdings centrally
- Suboptimal internal governance leading to a misalignment of objectives
- Inadequate internal transfer-pricing mechanisms
- A lack of optimization engines or the ability to deploy them effectively
- Inability to perform inventory projections
- Excessive staff costs as a result of process complexity.
The highest potential cost savings, according to survey respondents, can be achieved by:
- Reducing the number of collateral pools or silos
- Implementing a single IT solution that provides a complete overview of all assets across all business entities
- Adopting optimization algorithms
- Improving internal transfer-pricing mechanisms.
The Accenture/Clearstream report "Collateral Management: Unlocking the Potential in Collateral" is available upon request.