One in three financial institutions will accept cheap collateral
22 July 2013 London
Image: Shutterstock
Over a third of financial institutions believe that it is acceptable for collateral to be low quality, complex and opaque, so long as it is cheap.
A survey from post-trade services provider SIX Securities Services found that 43 percent of those surveyed believe that collateral should be simple, high quality, liquid and easy to value; 57 percent think that price of collateral is more important than quality; and 35 percent think that it is acceptable for collateral to be low quality, complex and opaque, so long as it is cheap.
SIX Securities Services’s research also found that 53 percent of financial institutions estimate that high grade collateral will increase in cost by about 9 percent before 2015.
But, in the race to find collateral, 48 percent of respondents agreed that securitising and repackaging existing portfolios to create new collateral pools will result in additional risk and could contribute to the next financial crisis.
Robert Almanas, managing director for international services at SIX Securities Services, said: “It is a frightening prospect that in today’s market, over a third of financial institutions are willing to accept collateral simply because it is cheap.”
“When our competition begins to compete on the quality of collateral they are prepared to take, the ‘race to the bottom’ becomes a very real outcome. Fair competition should revolve around responsive, real-time platforms and excellent client service supported by appropriate regulation—not reliance on a dilution in what is considered to be high quality collateral.”
“We believe that collateral should be simple, of high quality, liquid, and easily-valued—these collateral values are fundamental to the future success of the financial markets.”
A survey from post-trade services provider SIX Securities Services found that 43 percent of those surveyed believe that collateral should be simple, high quality, liquid and easy to value; 57 percent think that price of collateral is more important than quality; and 35 percent think that it is acceptable for collateral to be low quality, complex and opaque, so long as it is cheap.
SIX Securities Services’s research also found that 53 percent of financial institutions estimate that high grade collateral will increase in cost by about 9 percent before 2015.
But, in the race to find collateral, 48 percent of respondents agreed that securitising and repackaging existing portfolios to create new collateral pools will result in additional risk and could contribute to the next financial crisis.
Robert Almanas, managing director for international services at SIX Securities Services, said: “It is a frightening prospect that in today’s market, over a third of financial institutions are willing to accept collateral simply because it is cheap.”
“When our competition begins to compete on the quality of collateral they are prepared to take, the ‘race to the bottom’ becomes a very real outcome. Fair competition should revolve around responsive, real-time platforms and excellent client service supported by appropriate regulation—not reliance on a dilution in what is considered to be high quality collateral.”
“We believe that collateral should be simple, of high quality, liquid, and easily-valued—these collateral values are fundamental to the future success of the financial markets.”
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