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Freeing up Nostro/Vostro funds, Basel 3 and bank capital requirements,

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The main idea I am thinking about here is, "How exactly could this freeing up this nostro/vostro capital actually impact the banking systems inventory of money available to lend?"

http://www.basel-iii-accord.com/

I dont know much about Basel 3 other than it was done post crash, and focused a lot on bank capital requirements. Doing a little bit of googling, I find that Basel 3 requires banks to calculate a Liquidity Coverage Ratio (LCR) which looks like it is simply the banks expected inflows / outflows over the next 30 days. My understanding is that various types of assets (cash, real estate, SWAPS, Nostro/Vostro accounts, etc) each asset can contribute some % of it's value to the bank's inflows & outflows, and meeting the bank's capital requirements.

The question is, "How are the funds currently deployed in Nostro/Vostro accts contributing to capital requirements?"

Quote

104. The portion of the operational deposits generated by clearing, custody and cash management activities that is fully covered by deposit insurance can receive the same treatment as “stable” retail deposits https://www.bis.org/publ/bcbs238.pdf 

At the bottom of that pdf is a quick reference chart that shows "Stable Retail Deposit" outflows multiplied by a 5% factor.

I assume it works so that if bank A had $1000 deposited by another bank B, that the $1000 deposit at bank A would contribute $50 to the outflows of bank A?

Or is it 25%? Also at the bottom there is another category "Cooperative banks in an institutional network (qualifying deposits with
the centralised institution)"
which gets a factor of 25%, which would bean $250 to outflows.

As a bank you would want a low factor for Outflows, and a high factor for Inflows, both of which would make it easier to have a ratio at or above 1. An LCR of 1 means the bank has enough qualifying liquid assets to meet it's expected outflows for the next 30 days, more than 1 means they have more money.

If adopting xCurrent and especially xRapid (due to sourcing liquidity not from deployed nostro/vostro capital, but rather from public trading activity) enables the banks to reclassify these funds in a way that improves the factor applied to these funds... the banks will be very seriously interested in learning more.

Does anyone here have a more detailed understanding of Basel 3, and/or know how these funds may reclassified when the "deployed funds can be called back"? Please point me to some links and other info. Thanks

 

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Posted (edited)
1 hour ago, KarmaCoverage said:

The main idea I am thinking about here is, "How exactly could this freeing up this nostro/vostro capital actually impact the banking systems inventory of money available to lend?"

http://www.basel-iii-accord.com/

I dont know much about Basel 3 other than it was done post crash, and focused a lot on bank capital requirements. Doing a little bit of googling, I find that Basel 3 requires banks to calculate a Liquidity Coverage Ratio (LCR) which looks like it is simply the banks expected inflows / outflows over the next 30 days. My understanding is that various types of assets (cash, real estate, SWAPS, Nostro/Vostro accounts, etc) each asset can contribute some % of it's value to the bank's inflows & outflows, and meeting the bank's capital requirements.

The question is, "How are the funds currently deployed in Nostro/Vostro accts contributing to capital requirements?"

At the bottom of that pdf is a quick reference chart that shows "Stable Retail Deposit" outflows multiplied by a 5% factor.

I assume it works so that if bank A had $1000 deposited by another bank B, that the $1000 deposit at bank A would contribute $50 to the outflows of bank A?

Or is it 25%? Also at the bottom there is another category "Cooperative banks in an institutional network (qualifying deposits with
the centralised institution)"
which gets a factor of 25%, which would bean $250 to outflows.

As a bank you would want a low factor for Outflows, and a high factor for Inflows, both of which would make it easier to have a ratio at or above 1. An LCR of 1 means the bank has enough qualifying liquid assets to meet it's expected outflows for the next 30 days, more than 1 means they have more money.

If adopting xCurrent and especially xRapid (due to sourcing liquidity not from deployed nostro/vostro capital, but rather from public trading activity) enables the banks to reclassify these funds in a way that improves the factor applied to these funds... the banks will be very seriously interested in learning more.

Does anyone here have a more detailed understanding of Basel 3, and/or know how these funds may reclassified when the "deployed funds can be called back"? Please point me to some links and other info. Thanks

 

Well, we have been discussing this, and i have not been able to find concrete answers. However, i did find a piece detailing the thought process banks would use (Accenture) in a normal world with out digital assets, and then found a quick blurb from a video (Accenture, Reisbank, and Ripple). So, the people who would be experts are already discussing this with their clients. But it is a rabbit hole indeed. 

https://www.accenture.com/_acnmedia/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Dualpub_9/Accenture-Liquidity-Coverage-Ratio.pdf

(I couldn't help but think about how XRP fits in with the thinking in this work flow.)

https://www.accenture.com/t00010101T000000__w__/de-de/_acnmedia/PDF-44/Accenture-Ripple-Reisebank-video-transcript.pdf

Also shows application of Know Your Client.

 

Edited by XRPonTheIronThrone

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8 minutes ago, davygravy77 said:

Looks like an interesting rabbit hole you heading down....looking forward to your findings.

At the end of the day, however much "dead capital" can be "freed up" (the systemic improvement), it is going to be defined by how much capital inventory available to lend increases, and that number is defined by, or at least impacted by the Liquidity Coverage Ratio.

Which makes the real question somewhat about the reclassification of these Nostro/Vostro funds.

If RippleNet enables both 1. a reduction of float capital needed to fund operations, and 2. a change in how the remaining floated capital is classified resulting in improving LCR, then that will be a big of booster shot for banks... throw in a rising interest rate environment and bankers are happy folks.

My concern is the potential of reintroducing over leverage at the systemic level again. Both of those things would enable banks to lend more with less assets, aka increase leverage.

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Posted (edited)

I think it’s already included in liquidity surplus. 

 

Cant find the article I read about it in at moment. 

Edited by kiwixrp

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Posted (edited)

https://thomasmurray.com/opinion/importance-centrally-managed-account-platform

 

this article puts the cost of a Nostro account at between 35-50k a year. This is where switching to XRP solution will help. And I’m sure the banks will find a way to make money from the freed funds 

 

swift can get as fast as it likes. Still going to need Nostro accounts and correspondent banks so nothing will change really from a customer stand point. 

Edited by kiwixrp
Give swift a kick

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4 minutes ago, kiwixrp said:

https://thomasmurray.com/opinion/importance-centrally-managed-account-platform

 

this article puts the cost of a Nostro account at between 35-50k a year. This is where switching to XRP solution will help. And I’m sure the banks will find a way to make money from the freed funds 

That is very interesting. They seem to be attempting to solve the same problem as RippleNet, but with a centrally designed system. Good benchmarks on the costs savings.

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