Imagine setting sail to discover hidden treasure. You have a map in hand, but it’s outdated and filled with vague warnings like “Here there be dragons.” Would you trust it to lead you safely and swiftly to riches? Likely not. The same principle applies to your bank’s intraday liquidity management.
A map is no guarantee you will arrive at treasure. Your map could be incomplete, or misinterpreted. Similarly, liquidity data isn’t always useful or reliable on its own. To unlock its true value, your bank’s liquidity data must be accurate and analysed in the right context. If you get it right, it can lead to treasure. In banking terms this means lower capital costs, less stress and improvements to the bottom line.
“You need to step back and say how do I better manage cashflow going out the door? Part one is measuring and managing the daily flows to optimise the available cash at any point in the day. The second part is leveraging the intra-day data to see who pays you late every day.” —Barry Lewis, Associate Partner at London based management consultancy, Elixirr
If I believe the data, does that make it true?
Intraday liquidity management is shrouded in misconceptions. Some believe that calculating a generic liquidity buffer is a good enough answer, but this overlooks the complex realities of daily financial settlements. There’s a consistent disconnect between the theoretical approaches of finance teams and the operational needs of those handling real-time liquidity.
“Believing in the data does not necessarily make it true. The accuracy and reliability of data depend on its source, the methods used to collect it, and the context in which it is analysed.” Lindita Blakaj, Money Market and Investments Manager, Raiffeisen Bank of Kosovo
Barry Lewis brings 40 years of line operations experience at various tier 1 global investment banks, the last 20 years at MD level. He is now an associate partner at Elixirr, and is a recognised expert across operations risk, intraday liquidity and operations transformation. Lewis, along with Planixs liquidity expert Nick Nicholls, discussed misconceptions surrounding intraday liquidity management. They focused on the adverse effects that poor liquidity management can have on a bank’s operations and regulatory compliance.
On the bright side, Lewis helps banks of all sizes to overcome the challenges of inadequate real-time balance tracking, outdated methods, and resistance to change. He has seen how these issues can drive up costs and place significant strain on both people and systems until they are resolved.
What makes intraday liquidity management so stressful and costly?
Banks are under mounting regulatory scrutiny and face substantial financial risks due to poor liquidity management. This situation will only get worse as settlement windows shorten to T+1 around the world leading to increased fails and less time to position funds in the right bank account. Inaccurate tracking and management of intraday liquidity can lead to costly operational disruptions and compliance failures, jeopardising both financial stability and market reputation. Lewis says these problems start with:
Generic liquidity buffer calculations
One of the primary stressors in intraday liquidity management is the reliance on generic liquidity buffer calculations. Finance teams often base these buffers on theoretical models that assume all amounts due will settle on a specified value date.
This approach fails to reflect the dynamic and unpredictable nature of real-world financial transactions. Consequently, institutions may find themselves either under or over capitalised, leading to inefficiencies and the threat of unwanted regulatory focus.
This challenge is compounded as the operational teams may not have access to the real-time activity data that they need to effectively manage liquidity leading to sub-optimal decision-making in both the funding forecasting and the required capital buffer.
Inadequate tracking of real-time balances
If your institution struggles with inadequate tracking of real-time balances, you will also struggle with accurate liquidity forecasting. A lack of effective tracking systems can result in a foggy understanding of available liquidity, causing difficulties in predicting cash flow needs. This leads to higher costs as banks attempt to correct imbalances and ensure compliance with regulatory requirements.
The captain of the Titanic provides us with this analogy:
“”We do not care anything for the heaviest storms in these big ships. It is fog that we fear. The big icebergs that drift into warmer water melt much more rapidly under water than on the surface, and sometimes a sharp, low reef extending two or three hundred feet beneath the sea is formed. If a vessel should run on one of these reefs half her bottom might be torn away.” —Captain Smith, Captain, Titanic
Just as fog can conceal hidden threats like icebergs beneath the surface, a lack of effective tracking systems can obscure an accurate understanding of liquidity, making it difficult for banks to foresee and manage cash flow needs.
Case Study: Fix it, or else!
You may think these problems only affect smaller banks. However, Lewis mentions a prestigious, large bank with operations in multiple countries. The bank is under increased regulatory scrutiny to “reassess their liquidity management practices.” Which is a nice way of saying: “Fix it, or else!”
This diktat has prompted operational reviews that reveal significant challenges in data management and response times. The bank also faces complexity in managing liquidity due to varying international regulations, currencies, and market conditions, which can overwhelm their operational capabilities.
If the bank’s operational personnel are unaware of real-time balances or forecast positions, the institution will face difficulties in accurately assessing the bank’s current available liquidity.
“In today’s banking environment, there’s no excuse for not having real-time forecasting capabilities. Gone are the days when analytics limitations made it acceptable for banks to be in the dark about their current balance sheet positions. With the technology now available, it’s entirely achievable for banks to have a comprehensive, up-to-date view of their finances. They can readily perform scenario analyses, stress tests, and real-time liquidity assessments. This isn’t a fantastically challenging task anymore; it’s a necessary standard to meet for accurate and timely financial insights.” —Moorad Choudhry, Chairman, DCRO Stakeholder Supervisory Board, Author, The Principles of Banking
Regulators may mandate banks to increase their liquidity buffers by a significant percentage (e.g. 50%) if they are unable to demonstrate effective control over their liquidity management. This can place additional financial strain on the institution until they can provide evidence of improvements.
The phrase ‘domino effect’ comes to mind.
Why improving intraday liquidity management is in your bank’s best interest
If the image of a large ship or bank sailing into murky waters fails to convince you, Lewis offers six compelling reasons why improving intraday liquidity management is in your bank’s best interest:
- Real-Time Balance Visibility: Effective intraday liquidity management allows banks to track and analyse their real-time balances, which can prevent excessive long or short cash positions and enhance decision-making regarding payment releases.
- Improved Efficiency: By managing payments more smartly and netting cash flows effectively, banks can significantly reduce the amount of liquidity they keep in buffers, which can lead to significant reductions in very expensive capital buffers.
- Regulatory Compliance: Banks may face scrutiny from regulators regarding their liquidity management practices. A bank that evidences transparency and attempts at “best practice” in its intraday liquidity management can address regulatory concerns and ensure they are in compliance with standards.
- Counterparty Risk Management: Enhancing intraday liquidity capabilities allows banks to better manage their counterparty credit risk, which is a vital aspect of overall capital management.
- Adaptation to Market Changes: The shift from low to normal interest rates emphasises the need for financial institutions to be more proactive in their liquidity management strategies to adapt to changing market conditions.
- Transitioning to T+1: Adopting real-time liquidity management will be essential in navigating the tighter settlement windows and increased demands for efficiency that come with T+1 and beyond. This will require some banks to make significant infrastructure updates:
“We have to move away from batch processing, and we have to move to real-time processing. That’s a massive change, especially in the UK and Europe, which is going to be far more difficult to achieve than it is in the US.” —Gary Wright, Director, ISITC Europe
To make liquidity management even more effective, Money Market and Investments Manager, Lindita Blakaj shares her practical insights:
- Central Bank Facilities: Use central bank intraday credit (loan) facilities to ensure liquidity during the trading day. This approach allows banks to avoid holding excessive liquidity, knowing that incoming and outgoing payments will balance out. Additionally, it helps manage intraday liquidity buffers effectively with the central bank, reducing costs.
- Payment System Innovations: Use advanced payment and settlement systems like RTGS (Real-Time Gross Settlement) to enhance liquidity efficiency and reduce associated risks.
“The better real-time insight you have into your overall liquidity, the better you’ll be able to engage in intraday markets and intraday transactions.” —Brian Nolan, CEO, Finteum
How do I get this done?
We are seeing a paradigm shift in how financial institutions manage liquidity and navigate the complexities of modern-day transactions. A growing number of bank departments are concluding that they require real-time data to do their jobs more effectively, including those in treasury, front office, risk, and operations. There’s no need to be satisfied with approximations and workarounds anymore.
According to one partner bank of Planixs, “Companies not using real-time liquidity data are at a massive disadvantage. Choosing to manage liquidity the ‘old-fashioned way’ or manually when real-time technology exists doesn’t make any sense.”
With the expectations from regulators that we have discussed, real-time monitoring is no longer nice to have.
Another bank highlights that, “If you’re paying your treasury staff to manually manage liquidity data, essentially, you’ll be paying skilled professionals to do basic administrative tasks.”
Implementing real-time liquidity management empowers banks to operate more efficiently, meet regulatory demands, and stay competitive in an increasingly data-driven financial landscape.
“The key to successful intraday liquidity management is anticipating and preparing for the unexpected, ensuring you have the right resources at the right time.” — Lindita Blakaj, Money Market and Investments Manager, Raiffeisen Bank of Kosovo
In essence, the message is clear – don’t guess, know.
