15 MayIntraday Liquidity. How many “accounts” or Nostros are needed? Reciprocity. Lesson 3
With new rules coming into effect on Jan 1 2015, this is the eleventh in a series of posts on how banks and FI’s might adapt.
Inside of banks, there are often transaction services teams selling services to other banks. More often than is healthy, an “R” word creeps into these dealings: Reciprocity. As in, “I will open an account with your bank, if you open an account with mine.” This is ugly and about as much fun as the Ebola Virus, as the accounts just keep spreading. An old colleague of mine moved to the US, where he ended up in charge of NetMan for a super-regional bank. His starting inventory of Nostros was 3,500. Wrong number.
There is a legitimate side to this, the balance of trade. If you are spending money with a vendor, could they spend and are they spending money with you? This can be a wide church. For example, you may not provide Nostro services, but you buy your USD Nostro services from JP Morgan. You might ask, or even insist, that JPM reciprocate by participating in a credit facility.
There is no one magic answer to this question, although the answer to the number of accounts is an unequivocal “as few as you possibly can”. Certainly, opening an account somewhere simply so a relationship manager can make his client happy is a bad practice. The NetMan team has to be a bank’s conscience here.
Lessons Learned: Reciprocity is generally not a good thing. In Switzerland we do like our rules and we will also admit that there is no rule for which there is no exception. In the world of bank accounts, a recent bit of work has highlighted to me that there is a case where the R word can be used. Market access. Nostro services as a stand-alone offering are somewhat limited in their attraction. Imagine you are an emerging markets bank and want a good Nostro offering in the major currencies; it would be fair to offer Nostro services in your market in return to those who help you.
A personal request: Finally. I have ventured into self-publishing. I am hoping one or other of these modest offerings will be of interest.
Book #1: The Bankers’ Plumber’s Handbook
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Book #2: Cash & Liquidity Management
An up to date view of the latest issues and how BCBS guidance that comes into force from Jan 1 2015 will affect this area of banking. Kindle and hard copy.
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