The United Banks of Europe

How do you take the payments networks of 25 European Union countries - each with its own set of banking institutions, regulators and laws - and knit them together for clearing and settlement? Very carefully.

The industry-run EBA CLEARING company operates three euro-denominated payment systems for intra-EU traffic: EURO1 for high-value payments, STEP1 for commercial transactions, and STEP2 for bulk payments. But these systems have not yet been adopted to the fullest extent throughout Europe. EBA CLEARING has to overcome this challenge in order for the Single Euro Payments Area (SEPA) to live up to its potential. Thus, EBA CLEARING has been pushing ahead with several improvements to the European payment system.

For multinational banks involved in high-value payments using EURO1, one key improvement (implemented in February '05) has been the ability to aggregate liquidity for bank groups with operations located in different countries. Without this option, a bank group with subsidiaries or branches in several European countries would have to maintain separate pools of liquidity as collateral with each country's respective central bank. In aggregate, the dispersed liquidity creates a less-efficient allocation of capital than the pooled model. In EURO1, "All of these entities - subsidiaries and branches - can use one liquidity position," explains Lichter. "This liquidity position is supported by one liquidity collateral pool that the parent bank sets up." Concurrently, information about a bank's overall position can flow both to the headquarters and its subsidiaries as needed.

In early 2006, the EURO1 platform will implement another improvement toward the efficient use of capital by its members. Specifically, EBA CLEARING maintains a "pre-fund" account with the European Central Bank into which member banks pay prior to settlement. Currently, the funds deposited into this account cannot be used as collateral for EURO1 transactions. Starting next year, however, those funds will count toward a firm's overall liquidity. "A bank can use its own funds to pay into this pre-fund account and then have this liquidity recognized in the EURO1 system," explains Lichter. The EURO1 service is operated by SWIFT (La Hulpe, Belgium), which also acts as the messaging hub.

Eat a PE-ACH

Perhaps EBA CLEARING's greatest challenge will be to create a true Pan-European Automated Clearing House (PE-ACH). Under SEPA, by 2010, European debit cards, credit and debit transfers would work seamlessly throughout the eurozone, just as the euro currency is accepted today across boundaries.

EBA CLEARING's initiative toward the PE-ACH is its STEP2 system, which would effectively short-circuit Europe's fragmented national payments networks. This involves directly connecting banks from the EU and the European Economic Area (EEA) to one central processing system so that direct debit transfers, pan-European payments and even "domestic," in-country payments can occur through a common infrastructure.

STEP2 receives banks' credit transfers in large files and distributes these bulk payments across national boundaries to recipient banks all over Europe. Currently, all but four of 25 European Union countries have a "defined entry point" for STEP2 payments, which is at least one bank within that country that can route STEP2 payments to any bank within the country. In some countries, several banks actually compete to become the entry point, while in others the responsibility is rotated among several banks. "We are working on completing the full series of EU member states," says Lichter.

The STEP2 service is operated by Societa Interbancaria per l'Automazione (SIA; Milan), which, along with SWIFT, provides connectivity to STEP2.

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