09 January 2006

BIS: Report on cross-border collateral arrangements

The Committee on Payment and Settlement Systems (CPSS) published the report Cross-border collateral arrangements. This report describes existing institutional arrangements through which central banks accept collateral denominated in a foreign currency or located in a foreign jurisdiction to support intraday or overnight credit, either routinely or in an emergency. It also discusses alternative models for the acceptance of foreign collateral. In addition, the report identifies the potential implications of a central bank’s collateral policy for financial stability, competition and the safety and efficiency of payment systems.

The report notes that large internationally active banks must manage their collateral and liquidity in multiple currencies and jurisdictions, and, as a result, they are developing new techniques to conserve collateral and liquidity. Accordingly, accepting foreign assets as collateral, either routinely or only in extraordinary circumstances is an option that central banks could take in order to address commercial banks' intraday liquidity requirements.

The analyses in the report are based on the experience of the G10 central banks and the outcome of a series of interviews conducted with selected internationally active banks.

The G10 central banks have agreed on an “à la carte approach”, under which each central bank decides independently whether and, if so, under what circumstances, to accept cross-border collateral. Such an approach recognises the diversity and complexity of domestic financial markets, liquidity usage, and central bank operational structures. Furthermore, some form of coordination and cooperation among central banks may increase the effectiveness of an individual central bank’s policies and actions, or may aid the private sector in developing more advanced tools for managing collateral and liquidity.

Report

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