Black Swan events: Tackling the undertow with intelligent tech

Black Swan
Pete McIntyre, the liquidity expert

Written by Pete McIntyre

December 12, 2023

You know where you are with a lion; it sleeps and then it hunts. A black swan is not as predictable. Plan for it, or you’ll discover that its dark undertow has pulled you deep into trouble. By then it will be too late.

In the financial industry, the term “Black Swan event” has gained notoriety as something that catches everyone off guard, leading to a crisis that seems to emerge out of nowhere. In this blog, our experts will explore what Black Swan events are, how they impact the banking sector, and how intelligent technology can help institutions avoid unpredictable disasters. We will also examine some horror stories to illustrate the importance of being prepared.

In the context of the banking industry, Black Swan events refer to crises like the Wall Street crash in 1929, the Asian financial crisis in the ’90s, the global financial crisis of 2007-2008, and more recent events, like March 2023, when three small- to mid-size US banks failed. These events are often considered predictable in hindsight but catch the world by surprise on the day.

Understanding Black Swan Events

Black swans were once believed not to exist. Then Europeans discovered black swans in Australia, so these elegant birds became a metaphor for unexpected events that were previously thought impossible.

The Link Between Black Swans and Liquidity

The underlying cause of a Black Swan event may vary, but the common thread is that banks tend to crumble when they run out of liquidity. For instance, the collapse of Lehman Brothers during the 2008 financial crisis wasn’t just due to the subprime mortgage crisis; it was also a result of insufficient liquidity to meet their immediate needs. Having liquidity when it’s needed is crucial to surviving a crisis.

Case Study: Credit Suisse’s Black Swan Event

To understand the impact of Black Swan events, we can look to Credit Suisse. While it was evident that the bank had challenges, the speed at which depositors withdrew their money was unprecedented. Another bank where this created massive problems, was Silicon Valley Bank which lost 85% of its deposits over just two days.

One critical issue was that the assets Credit Suisse relied on for long-term liquidity were suddenly needed for short-term obligations. This left them with a severe shortage. In such cases, timely information and real-time liquidity management make all the difference.

How to Plan for the Next Black Swan, and Reap the Rewards

The consequence of not working in real time brings a huge element of risk – you are left to react after the event as opposed to forecasting what might happen and responding to minimise exposure. The wrong liquidity tools often bring multiple UI’s requiring cut and paste from system users, adding risk from human error and generating questions upon review from local regulators. So how are the world’s largest banks reaping the rewards of real-time visibility across their liquidity landscape and what action should you take?

Action Point 1: Real-time Liquidity Management

To prepare for the next Black Swan event, banks and financial institutions should invest in systems and technologies that provide up-to-date information about their liquidity. Having the ability to monitor and manage liquidity in real-time can make all the difference in responding to crises.

Action Point 2: Strengthening Risk Culture

A key element is to foster a culture that goes beyond short-term profits and bonuses. Banks need a sharper focus on risk management, and developing plans to mitigate those risks.

Action Point 3: Regulator Oversight and Small Banks

Regulators play a crucial role in preventing idiosyncratic problems from becoming systemic crises. To achieve this, they are increasing their oversight and must ensure that smaller banks are not overlooked. Small banks are equally important in the financial ecosystem and must plan to mature their capabilities.

Action Point 4: Focus on Intraday Liquidity

Recent crises have highlighted the importance of intraday liquidity. Regulators may start emphasizing the need for separate strategies to cover daily operations and potential runs on the bank. Banks should be prepared to manage both aspects efficiently.

Knowledge is Power

Black Swan events remain unpredictable, and the last 12 months have accelerated the need for greater liquidity insight. We’ve seen how various factors can create extreme volatility in a treasury’s liquidity position and regulators are asking more and more for firms to demonstrate greater control and insight.

Wouldn’t it be better to know what the state of your in-and-out liquidity is in real-time, at any given moment of the day, and make sure it starts earning you money rather than costing you?

You can make incredibly accurate forecasts of your real-time liquidity usage using the right tech. Imagine the power that knowledge gives you.

Real-time liquidity management is a gateway to transforming your operations and untapping opportunities for growth. You will get a goldmine of actionable insights that will allow you to be a change-maker in your organisation.

Real-time liquidity intelligence is powered by Realiti® Software from Planixs. Built by experts who have worked in the banking sector for decades, Realiti provides a real-time liquidity lens with a dynamic view across cash and securities management metrics and controls.

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