Globally, the collateral management market is worth more than €10 trillion—and an estimated €4 billion can be generated by improving collateral management practices. Well, that begs the question: how can financial institutions improve their collateral management practices?
Research study by Accenture and Clearstream
Accenture and Clearstream took a two-part approach to examining collateral management practices in financial services. First, we referenced public information from official, well-known sources. Then, we conducted interviews with 16 global banking institutions. With assets of approximately €14 trillion, these institutions represent close to 20 percent of the global banking system.
Collateral management for investment banks
Since the 1990s, investment banks and broker dealers have aspired to have a view of positions across all asset classes, as well as the degree to which they’re encumbered. That’s not surprising, since investment banks lack a stable deposit funding base and therefore, collateral management is a core function for them—one that enables them to monetize their assets (and their clients’ assets, where applicable) through secured financing.
The next step is the creation of a single, rather than fragmented, view on a single collateral management platform. It’s no small feat to have a centrally managed view that enables sophisticated optimization processes. At minimum, it means extensive, prolonged IT investment; in at least one case, a respondent suggested the process has taken more than a decade.
Collateral management for retail and wholesale banks
With a large and relatively secure deposit base, retail and wholesale banks have mostly relied on a business model that lends long and borrows short. As a result, liquidity pricing took a short-term view and didn’t effectively account for the liquidity demands of long-dated assets. Collateral management was largely a back-office, operational support function.
Since the economic downturn, retail and wholesale banks have recognized the need for longer-term liability planning, and have also developed alternative forms of asset finance, such as covered bonds.
Next week, I’ll discuss the internal and external efficiencies that are created with better collateral management capabilities.