By operating on a net basis, EURO1 enables banks to significantly reduce the liquidity required to support their payments business; thanks to the binding intra-day limits in EURO1, individual payments do not need to be fully covered beforehand, as in a real-time gross system. Consequently, there is no requirement to pre-fund at the start of the day. The availability of a Debit Cap allows for participants to have immediate sending capacity and to send payments without having to wait for incoming funds. This considerably lowers the liquidity and capital support costs for banks.
In order to further recycle liquidity, EURO1 offers a liquidity bridge, which enables banks to proactively and independently manage their liquidity:
- Banks that have reached the maximum level of their Debit Cap can pay in funds from their TARGET2 account (pre-fund), against which their position in EURO1 is adjusted upwards. The bank has, as a result, acquired increased sending capacity against pre-funded liquidity.
- Banks that have incoming payments queued because they have reached the maximum level of their Credit Cap can authorise EBA CLEARING to withdraw liquidity from their credit position in EURO1 (liquidity distribution), which is then credited to the banks’ TARGET2 accounts.
- Pre-funding takes place throughout the day and liquidity distributions take place at the six most critical times to ensure the release of the maximum number of queued payments.
- The liquidity distribution algorithm allows for the pre-funded liquidity to be recycled.
As a result of the liquidity management tools available, the EURO1 system is able to achieve a high Liquidity Efficiency Ratio (LER).
Banks can further exploit the liquidity-saving benefits of EURO1 by including branches as well as consolidated affiliates within the European Economic Area (EEA) under the single liquidity position of the participant.
EURO1 Liquidity Bridge
EURO1 is geared at assisting banks in keeping cost down by enabling them to optimise their liquidity use. The system's Liquidity Bridge makes it possible for banks to withdraw excess liquidity from the system through seven daily liquidity distribution windows. The Liquidity Bridge also enables the banks to inject additional funds into EURO1 throughout the business day in order to allow for additional payments to be processed. This functionality supports the banks in resolving any queuing situations.