Auto-collateralisation

Auto-collateralisation is a method of intraday liquidity management that has been adopted in several high-value payment systems. It is a credit operation that involves the automatic generation of a collateralised loan to cover a payment obligation that would otherwise remain unsettled.

Overview

Auto-collateralisation is a mechanism that allows a bank to obtain intraday credit from a central bank against collateral. It is used in real-time gross settlement (RTGS) systems to prevent gridlock by ensuring that payments are settled in a timely manner.

The process of auto-collateralisation involves the automatic generation of a collateralised loan when a payment order cannot be settled due to insufficient funds in the payer's account. The loan is then repaid when sufficient funds become available.

Process

The process of auto-collateralisation involves several steps:

1. A payment order is submitted to the RTGS system.
2. The system checks whether the payer's account has sufficient funds to settle the payment.
3. If the account has insufficient funds, the system automatically generates a collateralised loan to cover the payment.
4. The loan is secured against eligible collateral held by the payer.
5. The payment order is settled using the funds from the loan.
6. The loan is repaid when sufficient funds become available in the payer's account.

Benefits

Auto-collateralisation provides several benefits:

1. It reduces the risk of payment gridlock in RTGS systems.
2. It allows banks to make efficient use of their collateral.
3. It improves the liquidity management of banks.
4. It reduces the need for banks to hold large amounts of liquid assets.

Risks

While auto-collateralisation provides several benefits, it also involves certain risks:

1. It increases the credit risk for the central bank.
2. It requires the central bank to manage the collateral effectively.
3. It may lead to an over-reliance on intraday credit.

See also

• Real-time gross settlement
• Collateral (finance)
• Central bank