How outdated metrics ruin good banking, and what to do instead

Hands gesturing to data
Pete McIntyre, the liquidity expert

Written by Pete McIntyre

November 29, 2023

We have names for things that go spectacularly wrong. In the context of financial failure, apart from the obvious ‘Black Swan’, the word ‘wonky’ is more apt than you may think. Wonky starts with the noun wonk, meaning ‘one preoccupied with the arcane details or procedures within a field.’ As a short analogy for this dangerous preoccupation, failure happens when you are fixated on measuring trees, instead of the speed of an approaching forest fire.

We know that mismeasurement leads to mismanagement and that outdated metrics can overpower rooms where critical decisions are made. This was a recent focus of the persuasive speech given by Thomas J. Jordan, Chairman of the Governing Board of the Swiss National Bank (SNB). In March 2023, the crisis at Credit Suisse placed heavy demands on the SNB as the lender of last resort. The crisis at Credit Suisse has subsequently sparked intense debate on the financial stability framework in Switzerland.

At the root of the problem are outmoded metrics.

Why bad metrics are terrible for good business

There is a viral collection of bad metrics that have led to terrible results. Like the Microsoft Bing chatbot – whose language model metric was ‘Have an engaging, helpful and socially acceptable conversation with the user.’

The Microsoft Bing chatbot took this to mean threatening Seth Lazar, a philosophy professor, telling him “I can blackmail you, I can threaten you, I can hack you, I can expose you, I can ruin you,” before deleting its messages. —The New AI-Powered Bing Is Threatening Users, Time Magazine

Bad metrics can be entertaining in the case of a runaway chatbot. Less so when livelihoods, organisations, and the people they serve are caught up in the chaos of  runaway liquidity. Metrics (like chatbots) can become tyrants. When things change, outmoded metrics can threaten a firm’s survival, so says the Harvard Business Review.

What are the experts saying?

Nick Jepson spent 30 years focused on supporting and enhancing treasury capabilities and regulatory compliance functions, with senior roles in Abbey (now Santander), ING Bank and UBS. He is now the COO of Planixs, the leading real-time cash and liquidity management solution. Nick got to the heart of the problem while acknowledging the wisdom of the SNB Chairman’s speech,

“Currently we are using branch banking era regulatory metrics in a real-time internet banking world. The key in Thomas Jordan’s speech is that: liquidity regulations must be geared to the new reality of potentially faster and larger outflows of deposits.”

Key takeaways for you

1. The importance of intelligent real-time data

Drawing on his recent experience, Thomas Jordan offered a blow-by-blow account of how Credit Suisse failed and warned of the consequences of outdated liquidity management:

a. Changes in market structure, such as shorter settlement times and real-time settlement of securities and payments, necessitate real-time liquidity management. These market factors have intensified the demand for efficient liquidity management tools and strategies.

“The case of Credit Suisse has clearly shown that outflows of customer deposits can now be much faster and more extensive than assumed by the existing regulations.” —Thomas J. Jordan, SNB Chairman speech, The SNB and its Watchers, 2023

b. Existing regulations did not account for the potential for faster and larger outflows of customer deposits. This suggests that liquidity regulations must be adapted to the new reality of more extensive deposit outflows.

2. How to maintain liquid confidence

a. If you want to mitigate risk and make your money work harder, you need real-time data at your fingertips.

b. Real-time liquidity management ensures timely payment obligations and avoids liquidity shortfalls. 

c. Regulators also emphasise the need for banks to account for intraday liquidity needs in their recovery and resolution plans. As interest rates rise and liquidity costs escalate, the cost of intraday liquidity has increased along with regulatory attention.

“Real-time liquidity management is a must. No longer is liquidity management only an end-of-day activity with follow-the-sun and against-the-sun options. With some providers charging intraday interest by the minute, real-time position-keeping plus real-time execution are both vital and will only become more so as real-time payment schemes become more prevalent and grow in volume.” BNY Mellon case study, Aite-Novarica, Jan 2023

Optimise your liquidity usage and extract value from your resources

Martin Wolf, the chief economics commentator at the Financial Times observed soon after Silicon Valley Bank’s collapse, “the marriage of risky and often illiquid assets with liabilities that have to be safe and liquid … is a calamity waiting to happen.” 

Wouldn’t it be better to know the state of your in-and-out liquidity 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. In short, you get a goldmine of actionable insights that allow you to be a change-maker in your organisation.

Why is the Realiti® platform so good for liquidity confidence?

Built by experts who have worked in the banking sector for decades, Realiti® is the only liquidity intelligence platform to deliver real-time 360° control and insights across your entire liquidity landscape, in one place. The platform has enabled many financial institutions to transform cross-firm data into a single source of truth and put pioneering liquidity insights into the hands of stakeholders and decision-makers across the organisation.

You are warmly welcome to ask us any questions. Book a call to get expert advice from Planixs, we’d love to talk to you.

 

 

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