Catch 22. Transaction Banks find themselves in an awkward set of circumstances of almost perfect storm like quality.
Regulation, such as BCBS 248 and LCR, forces them to do all kinds of liquidity monitoring and keep reserves in the form of HQLA, High Quality Liquid Assets. Other regulations from the payments systems set rules for throughput. Right now, the single vital ingredient to meet those throughput rules is the intraday overdraft limit, the IDL.
Those IDL’s drive the need for HQLA, which drive costs, which get passed on to clients. Large clients will have IDL’s into 9 figures; billions. That attracts internal cost allocations, which have to be passed on to clients in some form or other; transaction businesses will be allocated based on client IDL’s, securities businesses on gross values, FX businesses on gross payments.
In the transaction business, those costs need to be past on. It will be hard to reduce the cost allocation, because it is the IDL that drives the payments in the real world. If limits are reduced, throughput targets may not be met, which may bring about demands from regulators to have more HQLA.
There is no way out Or is there? Too much cash is flowing; whether net or gross, with the current rules and the current tools available, the payments that need to get made require huge IDL’s from the banks.
The banks have been helped massively in recent years by CLS; 96% or so compression. Without it, the impact of the current rounds of regulation would be very painful.
What’s missing is the right piece of infrastructure. The global financial services industry needs a new model; a means to net payments across all clients, in many currencies. If less cash needs to flow, lower limits will be needed, which will lead to a reduction in HQLA, which will lower costs.
Lessons to be Learned: Without the right infrastructure, the industry is condemned to see increasing costs. Infrastructure does not get built easily; years ago it took the G20 and The Allsopp Report, threatening unspeakable things to the industry if it did not act, to create CLS.
The regulators have created this Catch 22. They need to help create the international push for new infrastructure. A new G20 Working Group is needed. Perhaps the CPMI, the Committee on Payments and Market Infrastructures, a part of the BIS that I have only recently heard of, is the right body to start the ball rolling.
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