To manage liquidity without losing your way, you need a real-time GPS

manage liquidity in real time with Realiti
Pete McIntyre, the liquidity expert

Written by Pete McIntyre

April 16, 2024

All disasters happen on crunch days. James R. Chiles tells dramatic stories of moments when invincible systems lose their way, crash, burn or sink. In his book, Inviting Disaster, Chiles demonstrates that major problems start with disorientation; the overlooked, or seemingly insignificant issues that escalate on crunch days.

Losing your way is all in the details

A bank, like a ship, loses its way when mistakes are made, or vital details are missed. The ‘unsinkable’ Titanic was manufactured with safety compartments to hold water at bay if an iceberg struck the ship. The safety compartments failed because the rivets – iron bolts holding the compartments together – were manufactured in haste. Costs were cut and so were corners. The iceberg found the ship, the sea found the weaknesses in the safety compartments and the rest is history.

The ‘indestructible’ Ocean Ranger oil rig floundered in high seas typical to the Grand Banks where the rig was located. Although the rig had been specifically designed to survive these high seas, the collapse of the rig started with a tiny window that someone was meant to shut.

The small cracks beneath the surface

Liquidity management is all about maintaining accurate details, the right balance and being prepared for the unexpected. It’s a continuous monitoring, planning, and adjusting process to ensure that the financial institution remains resilient and profitable. Yet, excessive complexity and poor oversight still threaten many parts of the financial system. Again, recent crises have shown that overlooking minor details can lead to significant problems.

Ill-prepared for the unexpected

Banks often operate under the guise of invulnerability – remember the “London Whale” trading scandal at JPMorgan Chase? The bank’s own review committee report said that the bank gave misleadingly optimistic reports to JPM senior management until dramatic  issues surfaced in April-May of 2012. The risk and finance functions were not providing appropriate oversight and control of the portfolio, and failed to recognise the size, complexity, risk, and magnitude of the issue as conditions worsened. Risk limitations were overly ambiguous and expansive. Furthermore, the Value at Risk (VaR) model had serious flaws, so everything was under or over-estimated.

Ratios are good, but crises are hard to predict

Maritime regulators emphasise the importance of ensuring ships maintain an appropriate ratio of lifeboats to passengers. That’s similar to the need for capital reserves to act as a buffer, so banks can absorb losses without endangering depositors or destabilising the financial system. However, the tragic sinking of the Titanic serves as a reminder of the unpredictability of disasters. Despite meeting regulatory requirements in terms of lifeboat provision, the ship fell victim to unforeseen circumstances—including the captain’s limited awareness of the iceberg’s exact location and size, the ship’s vulnerabilities, the frigid sea temperatures, and the complexity of any rescue operation.

Regulatory frameworks often draw from past crises, aiming to establish updated standards and ratios to manage future risks effectively. However, as evidenced by recent troubles faced by Credit Suisse, compliance with regulations such as a robust Liquidity Coverage Ratio (LCR) does not guarantee immunity from financial peril. In short, money was moving out of the door faster than the bank could bring it in. And it is no use saying you will be fine over a 30-day period if you crash, or sink, on day one.

The role of Treasury

Imagine your firm is a trade ship on the open seas. You want to ensure it sails smoothly, balancing the cargo (assets) and fuel (liabilities) efficiently, so the ship remains stable and reaches its destination (financial goals). So it can stay in business. It’s devastating to watch something that seems strong and unbreakable crumble in an instant.

In Treasury, you’re the person who makes sure resources are available at the right time, as efficiently as possible. And, ideally, with profit in tow. Your strategic prowess in effectively managing interest rate risks, safeguarding liquidity, diversifying funding sources (and somehow balancing everything) will set you apart:

  • Interest Rate Risk Management: You need to anticipate and adjust to the risk of changing fuel costs (interest rates) to make a return on any excess while avoiding financial loss if borrowing. 
  • Liquidity Risk Management: You must ensure the ship has enough fuel (liquid assets) to weather storms (financial stress), avoiding the fate of being stranded or wrecked.
  • Funding and Capital Management: You will determine the optimal cargo and passenger mix (funding sources) to ensure profitability while keeping the ship in business.
  • Behavioral Modeling: Predicting passenger behavior (customer deposit withdrawals) can be challenging, especially if there’s an offer from another ship (competitive interest rates).
  • Balance Sheet Management: Keeping the ballast and cargo balanced will prevent your ship from capsizing in rough seas (market risks).
  • Regulatory Compliance: Adhering to many and varied maritime laws (financial regulations) means you can enter and leave the harbour.

An accurate GPS changes everything

If you think about the introduction of GPS, what’s great is the precise, real-time data that helps you to navigate, handle logistics, and respond to emergencies with unparalleled accuracy.

Recent Deloitte research indicates that 64% of all treasurers struggle primarily to gain clear visibility of their financial operations. And it’s only getting more complex. Changes in market structure, such as shorter settlement times and real-time settlement of securities and payments, necessitate real-time liquidity management. These shifts underscore the urgency for adopting efficient liquidity management tools and strategies to stay competitive.

“This is nothing new. Over the centuries, banks have evolved ways of working to match the technology available at the time.” — Matthew Hargreaves, Luxoft

When you get an intelligent GPS, this happens

A large retail and commercial bank was struggling to navigate its liquidity management amidst regulatory pressures and operational inefficiencies. The Treasury was dealing with “spaghetti” architecture, lack of understanding, and visibility issues. Regulatory reporting was highly manual, and funding positions were too convoluted to calculate accurately.

To stop going around in circles, the bank needed the equivalent of a good GPS, in this case, a powerful tool called Realiti. This is the only software that can give companies real-time data, even if they’re dealing with millions of transactions every hour and have thousands of different accounts.

This clever software was seamlessly implemented with minimal intrusion into the firm’s infrastructure. The results were remarkable. Realiti instantly provided enhanced visibility, accurate forecasting, and improved matching logic. As a result, the bank experienced a significant reduction in manual effort, mitigated the risk of errors, and gained greater control over funding and same-day activity monitoring.

The move completely changed how the company saw and used data and is already yielding substantial cost savings, estimated at $700,000 to date.

Don’t guess, know

The Titanic never got to New York. The ship found itself in distress, broadcasting a mayday signal, yet in disbelief at the severity of the situation. Misjudgments about the ship’s position and reliance on inaccurate information compounded the crisis. Had there been more lifeboats available, more lives could have been spared. However, there was an expectation of external assistance, highlighting the ship’s assumption of rapid help from a vague ‘someone else.’

The ship had been warned about icebergs, but when push came to shove, decisions were made slowly or too late. Regulators continue to warn banks to manage their risk, but the actions of Credit Suisse bear some resemblance to the slow and late approach.

If Titanic was sailing today, real-time GPS technology could have provided accurate insights into the unfolding situation, enabling better navigation and informed decision-making. Using this logic, we can agree that when a treasury manages and monitors liquidity with real-time data, the bank will reduce the need for overnight funding, minimise short positions, and make efficient use of credit lines. With this in place, firms can handle shifting market conditions and regulatory requirements with more confidence, ultimately delivering better outcomes for their clients and stakeholders.


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