CENTRAL BANKS RESPONSES TO COVID-19: HAVING THE RIGHT COLLATERAL MANAGEMENT SYSTEM MAKES THE DIFFERE

As we mentioned in a previous article published in the Central Banking magazine, Central Banks have been impacted over the past decade by several drivers of change and remain under the constraint of being impacted again at any point as managing uncertainty remains the leitmotif of their activity.

Central Banks must be able to respond swiftly to any new change that may impact the economy and must be prepared for all types of events including the “unknown unknown”.

The Covid-19 or the “Coronavirus” crisis can be considered as one of these “unknown unknown” events that no one was expecting to happen in 2020. No one was expecting that what was initially a flu-like disease will be a global health crisis and would then lead to lockdown of the half of the world population and to a major economic and financial crisis.

Not a single country has managed to be unaffected by this crisis. Major Central Banks have been very reactive regarding this crisis and several swift and firm decisions have been taken in order to increase liquidity in different currencies and ease the collateralisation processes. According to analysts these decisions have surpassed those taken during the 2008 financial crisis.

The ECB for instance, enhanced its Targeted Longer-Term Refinancing Operations (TLTROs) and have put in place a comprehensive set of collateral easing measures such as including Greek bonds in the Bank’s asset purchase for the first time. It foresees through its Pandemic Emergency Purchase Program (PEPP) the purchases at a volume of €750 billion of eligible private and public securities throughout the end of this year, and beyond if needed.

The Bank of England also responded to this crises by cutting the interest rate to 0.1%, offering long-term funding to banks and building societies and injecting a further £200 billion into the economy.

In Norway, Norges Bank has also taken new actions to respond to the COVID-19 crises by reducing the policy rate, the establishment of temporary U.S. dollar liquidity arrangements and the offering of new extraordinary F-loans to banks.

Putting in place such decisions and considering this drastic increase in the collateralisation process in context of emergency and lockdown put a particular strain on the IT systems of the Central Banks demonstrating again the importance of having an excellent Collateral Management System that: 

-enables via straight-through processing rules, increased automation of the collateralisation process, liquidity, payments, the generation of statements and margins. VERMEG’s solution for Collateral Management was indeed designed to offer maximum STP rates to allow CBs to concentrate on managing exceptions rather than time-consuming manual tasks. Central Banks using VERMEG’s solution have seen a 90% Increase of process automation through STP.

-is highly flexible and supports new collateralisation rules such new operations, pools and eligibility criteria in a timely manner. Through several flexible configurations offered by VERMEG’s solution, Central Banks are faster to bring new measures in the market.

-assures high efficiency by mitigating the operational risks in a stress and emergency context.

-is scalable in order to improve the processing capacity as we foresee the increase of collateral movements needed to provide more liquidity.

-is secure enough to avoid any intrusion risk and provide the possibility to work from home safely. Through ISO27001 and Veracode certificates we can be sure that VERMEG’s solution is secure enough and can be trusted by Central Banks.

Central Banks will always remain under the constraint of new challenges and they will need trusted partners that have the right solutions to face these challenges.