Basel III: Collateral Impact on Banks Further Presence in Payments
- Basel III regulatory standard requires that banks dispose of more liquid own funds. This may increase production costs of payment streams. In fact, formal fund management is not part of the core business of small, more specialised banks. Regulators now demand that their balance sheets be reinforced. This request still has to be validated by the G20 next November but could have two major collateral impacts on payments.
- First, some banks could pass on the cost of intraday liquidity on their prices. This reform will lead them to extend intraday liquidity supply further than the already admitted overnight period. However, payments can significantly lower the available intraday liquidity. Customers with large volumes will probably be charged more. This would contradict SEPA objective to reduce the cost of payments.
- Second, some banks could question their presence on this market, even more when payments are no major sources of revenue for them. If management of liquid assets induces an additional cost, they will retain a lower margin than their competitors. The largest financial institutions will benefit from this situation, since they process a larger proportion of “on us” payments (where payer and payee are both customers of the same bank/group). As these transactions do not cause a liquidity outflow, they can be charged less.
- Another unexpected operational impacts must be added : one on central bank interbank settlement. As explained during the International Payment Summit held end March in London, the wording of the draft European Regulation on SEPA end-dates encompasses all credit transfers and direct debits in euros. Yet, ECB TARGET2 scheme interbank operations are direct debits and credit transfers in euros. With no further indication, it theoretically includes high value transactions. After each daily clearing of retail payments, real-time gross settlement (RTGS) systems accordingly adjust the balance of each bank’s ECB account. UNIFI ISO 20022 format and XML language should apply here as well.
- This constraint will most likely result, by the second half of this year, in an evolution of the Commission’s text currently under study by European Parliament’s committees and by experts from the EU Council.