Real-time Liquidity Management

Pete McIntyre, the liquidity expert

Written by Pete McIntyre

June 18, 2024

Introducing real-time liquidity management

Real-time liquidity management is a fundamental element of the modern financial institution’s toolkit. 

As transactions become near-instant, as complexity in the global economy grows, and as institutions adapt to T+0 as the new standard for settlement, real-time metrics are suddenly imperative.

The importance of liquidity as an operational priority was made clear post-2008, and with the introduction of new safeguards intended to prevent another crash, liquidity management was pushed to the forefront. It is – or, rather, it should be – a Board-level priority and here is where there is an issue due to a limited understanding of what liquidity is and how it flows around the financial system.  Regulatory bodies, such as the European Banking Authority (EBA) and the Bank of England’s Prudential Regulation Authority (PRA), intensified their focus on liquidity management following the Global Financial Crisis (GFC). 

The Basel III framework encapsulated this change, which emphasised liquidity controls and the necessity for institutions to be adequately capitalised to withstand economic shocks. Regulatory Metrics like Liquidity Coverage Ratios (LCR) and Net Stable Funding Ratios (NSFR) now play a central role in this regulatory framework, mandating more rigorous and frequent reporting from financial institutions (FIs).

However, this shift towards more immediate liquidity oversight isn’t merely a safeguard. It’s also a strategic imperative in today’s near-instant global economy. The evolution of financial markets and the speed of transactions necessitate real-time liquidity management. 

Traditional monthly reporting cycles are simply no longer fit for purpose. Instead, institutions must adapt by accessing and analysing liquidity data in real-time – and they must ensure that the correct metrics are being presented to the Board promptly and that the Board understands what the metrics indicate and is able to question and challenge them. This capability is crucial not only for compliance but also as a core strategic advantage.

Liquidity crises often unfold at an alarming rate, as seen in recent institutional collapses, including notable incidents in 2023. A typical liquidity crisis, such as a bank run, occurs when an institution cannot meet withdrawals as quickly as they are requested. In such scenarios, the ability to monitor and manage liquidity in real time can mean the difference between a controlled response and a catastrophic failure; and as the speed of banking increases from branch banking and twice-monthly settlement cycles to instant internet-enabled fund transfers a bank run is now a sprint.

Moreover, real-time liquidity management offers strategic advantages beyond regulatory compliance. It enables FIs to make more informed decisions, respond swiftly to market opportunities, and effectively manage risks. This agility is vital for navigating the complexities of the current economic landscape, marked by uncertainties and rapid shifts.

The nirvana of real-time liquidity management needn’t be a pipe dream, and when achieved the benefits clearly justify the effort and deliver substantial benefits to the organisation, all the way up to the board level. FIs must be able to collect, process, and interpret vast amounts of often siloed financial data instantaneously. This transformation goes beyond technological upgrades; it necessitates a cultural shift within organisations, prioritising data-driven decision-making and continuous monitoring.

Why do real-time liquidity insights matter?

After the 2008 GFC, regulators emphasised the need for FIs to be well-capitalised to withstand systemic shocks and support economic growth. However, liquidity management, essential for stability, remains a critical concern in the face of escalating risks and uncertainties that could surpass those of 2008.

Despite this, liquidity management capabilities are still far behind where they need to be to protect the financial system, even in the largest institutions. 

Notwithstanding improvements in gathering and interpreting liquidity KPIs, a gap persists in real-time insight management capabilities. Basel III’s requirements, though foundational, are becoming outdated, as evidenced by the collapse of institutions like Credit Suisse, which met regulatory ratios but still failed.

The global economy, characterised by near-instant transactions, necessitates real-time data access for FIs. Current liquidity management processes, focused on periodic mandatory reporting, fail to provide a comprehensive, real-time view of liquidity positions. This deficiency becomes critical in fast-paced scenarios like bank runs, where the ability to meet withdrawals rapidly is crucial. Institutions, therefore, must adopt real-time liquidity management to remain compliant and agile, ensuring resilience in a speed-driven economy.

Using technology to unlock real-time liquidity insights

You don’t have to be Nouriel Roubini to sense the elevated degree of risk present in the contemporary financial landscape. Ensuring resilience in the face of the next crisis is a matter of existential importance for every institution.

Technology plays a pivotal role in this resilience-building process. Advanced data analytics techniques are revolutionising liquidity management in the financial sector, powered by Artificial Intelligence (AI), cloud computing and real-time data processing, enabling institutions to monitor liquidity levels, forecast cash flows, predict potential shortfalls, and react swiftly to mitigate risks before they materialise. 

This technological empowerment leads to enhanced decision-making capabilities, allowing for dynamic adjustment of asset portfolios and liquidity buffers in response to real-time market signals.

The advancements in AI, and more generally machine learning (ML), are revolutionising liquidity management, offering unparalleled precision and speed in pattern recognition and data analysis, significantly outperforming traditional methods.

Cloud computing and distributed networking have been similarly transformative in providing the infrastructure for real-time data access, essential for effective liquidity management. The cloud enables financial institutions to store, access, and manipulate data with a degree of agility that is far beyond most on-premises solutions, allowing institutions to rapidly scale storage and processing power, facilitating swift and informed decision-making.

However, the successful implementation of these technologies requires careful integration alongside existing systems and breaking down legacy silos. Effective liquidity management tools must integrate seamlessly, acting as an organising layer over existing processes or as a mesh for data gathering from previously isolated sources.

Real-time liquidity management is cross-functional

The siloing of information, expertise, and systems is a major problem in organisations of every size, and these risks become even more prevalent as an institution grows.

Until fairly recently, liquidity management was treated as ‘just’ a treasury matter. This meant that business-critical information was often not shared and stakeholders lacked visibility of key metrics. That situation is changing, and liquidity management is now increasingly treated as a cross-functional priority.

Liberating real-time liquidity information to be visible to every business function is not just about risk mitigation; it also supports the creation of new value. For example, front-office teams can leverage these insights for more informed trading decisions, and risk analysts can better understand the organisation’s overall position. This holistic view enables an agile response to market fluctuations, ensuring strategic alignment and operational efficiency.

Moreover, cross-functional access to liquidity data fosters a culture of shared responsibility for liquidity risk. In the same way that general risk management is now a cornerstone of decision-making for every function in every modern institution, we should also ensure that liquidity management is treated as a core competency.

Liquidity management and compliance

Real-time data also enhances the quality of regulatory reporting and adherence to regulatory standards. Instead of relying on historical or periodic data, which may not accurately reflect current liquidity positions, banks can provide regulators with up-to-date, comprehensive insights into their liquidity status. This transparency is not only crucial for compliance, avoiding severe penalties for non-compliance, but also for building trust with regulatory bodies.

The predictive opportunities inherent in real-time systems also enable banks to foresee potential compliance issues under various market scenarios. By simulating stress conditions, institutions can proactively adjust their liquidity strategies, ensuring robustness under different market conditions, thereby staying ahead of regulatory demands. In a landscape where regulatory scrutiny and expectations are continuously evolving, real-time liquidity management becomes an indispensable tool for maintaining compliance and operational resilience.

Managing liquidity risk in modern institutions

Real-time liquidity data also facilitates better risk management. It allows for immediate detection of potential liquidity gaps and aids in developing rapid response strategies to mitigate short-term solvency risks. This agility is critical for navigating sudden market shifts and avoiding liquidity traps that can escalate into larger solvency issues.

Further, new liquidity risk insights can be curated when combined with social media sentiment and other contextual data.

These insights bolster strategic decision-making in capital allocation and investment strategy. Banks with access to real-time liquidity data can make quicker, more informed decisions on credit extensions, interbank lending, and investment opportunities, aligning them with the institution’s individual risk appetite and business priorities, and with prevailing market conditions.

Planixs has developed a suite of liquidity management tools based on the principle of simple, deep integration. These tools enable banks and financial institutions to monitor liquidity in real time and aggregate data from various sources without the need to re-engineer existing systems. More importantly, they facilitate the translation of data into actionable insights, going beyond regulatory compliance to identify opportunities for enhanced financial performance.

Real-time liquidity management in global organisations

Managing liquidity in global organisations presents a complex matrix of challenges, chiefly due to the diverse regulatory environments and multifaceted financial operations spanning various countries. Each jurisdiction comes with its unique regulatory requirements, impacting liquidity management strategies. Navigating these disparate regulatory landscapes requires a nuanced approach to ensure compliance while optimising liquidity across different regions.

Additionally, global organisations often deal with multiple currencies, adding layers of foreign exchange risk and complexity to liquidity planning. Currency fluctuations can significantly impact the value of liquid assets and liabilities, necessitating sophisticated hedging strategies to mitigate these risks.

The sheer size of global organisations also means that their liquidity management must account for a vast array of transactions, both inter-company and with external entities. This requires robust internal systems for tracking and forecasting cash flows across numerous business units and geographical locations.

This can have a clear bottom-line impact. When institutions have the best possible insights into their liquidity positions, it becomes possible to free up capital that was otherwise being held in reserve and deploy it more effectively.

Harnessing the cloud for better insight generation

The cloud offers unparalleled scalability and flexibility, allowing banks to manage vast amounts of data with ease and agility. This is particularly beneficial for real-time analysis of liquidity, where the volume and velocity of data can be overwhelming for traditional on-premises infrastructures.

With SaaS, banks can leverage specialised liquidity management software without the need for extensive in-house IT development or maintenance. This reduces both upfront capital expenditure and ongoing operational costs. Moreover, SaaS solutions are typically updated regularly with the latest features and compliance requirements, ensuring that banks always have access to cutting-edge tools and remain in line with regulatory standards.

The combination of cloud computing and SaaS enables banks to deploy advanced analytics and machine learning algorithms, providing deeper insights into liquidity positions, and supporting more informed decision-making, which leads to improved risk management and operational efficiency.

Liquidity insight as a strategic advantage

Taking our cues from Warren Buffett, we might talk about the importance of “building the moat” around financial institutions. The moat represents the organisation’s competitive advantage; it’s the bulwark an institution establishes in order to preserve and expand its market share.

The most important underlying asset for many banks and financial institutions is the data they hold. By improving the quality of insight that can be derived from that data, stakeholders can produce better outcomes and create new value. 

Similarly, competitive advantage can be built and maintained by increasing the speed at which decisions are executed – provided, of course, that those decisions are based on the fullest possible understanding of any given scenario.

In an instant global economy, ‘at speed’ means in real-time. Liquidity management needs to happen at the speed of the market, and this means using the possibilities afforded by new technologies.

The future of real-time liquidity management

As we’ve seen, real-time liquidity management should by now be an integral part of every modern financial institution. By gathering and interpreting a range of data sources, deriving insights, and executing on those insights at speed, banks and other FIs can ensure they are moving at the speed of the markets.

This is important not only in order to ensure compliance with an increasingly strict regulatory regime. Real-time liquidity management is also one of the key ways in which institutions can build and maintain strategic advantage in a global economy that now operates on near-instant timeframes.

The future of real-time liquidity management is already here, but, to borrow from William Gibson, it’s not yet evenly distributed. Liquidity management capabilities still lag behind where they should be. Institutions are held back by a lack of internal specialist knowledge, and by cultural misunderstandings of liquidity as ‘purely’ a treasury issue. However, the technology required to facilitate true real-time data collection and insight generation is available to all.

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