Why real-time liquidity insights are a game-changer for the future of finance

People around a desk talking about liquidity
Pete McIntyre, the liquidity expert

Written by Pete McIntyre

November 13, 2023

In the first blog of our new series on real-time liquidity, we check the pulse on the current state of play, convince you to care about your firm’s liquidity, and share our insights into the future of real-time cash and liquidity management  

Should you even care about your liquidity management? 

As a senior finance executive, you might be wondering, “Why do I care about this?” It’s a good question. A fair question. The answer could be, well, perhaps you shouldn’t. Or, on second thought, perhaps you shouldn’t need to, because, after all, that’s “treasury business, so nothing to do with us.” And, you’d be right – in part. 

At least that is when it comes to thinking about traditional ways of managing liquidity. There are now remarkable technological advances happening behind the scenes. We’re here to draw the curtain back and show you why liquidity really matters

Keeping track of your health is important, isn’t it?

Think about hypertension, also known as having “high blood pressure”. It’s the number one risk factor for death on a global scale. If your health was at risk would you wait for your annual check-up to find out how bad your blood pressure was, or would you want to know the state of your health at all times?

These days, there’s no need to wait for a GP appointment which, when you think about it, is a retrospective assessment of your condition. We already have the technology to know right away if something is wrong with your health. 

People use wearable devices that monitor their vital signs in real time, providing the data in a user-friendly dashboard. That includes devices for blood pressure. 

The effect of a lack of liquidity is a lot like high blood pressure; your risk of having a stroke goes up if you have hypertension, just like your risk of collapse increases without adequate liquidity management. 

100% of failed banks, failed because of a lack of liquidity 

“Sure,” you might say, “but how often do banks fail?” 

Fairly often, as it turns out. In fact, it’s almost as if banks are designed to fail – according to the Federal Deposit Insurance Corporation (FDIC). From 2007-2019 there were a total of 532 bank failures in the United States. In 2010 alone, there were 157 bank failures. That’s an average of 48 bank failures per year during that period. 

And, as global rates have risen, we’ve reentered a higher-risk phase of turbulence that’s included the collapses of Silicon Valley Bank, Signature Bank, First Republic Bank, and Heartland Tri-state Bank, so far. 

All failed. Their deposits were either assumed by the FDIC or their carcasses were picked apart and taken over by larger, more regulated banks.

In other cases, such as Credit Suisse, the bank was rescued by a third party before the crisis took hold fully, but the trigger remained the same; a lack of confidence in the bank and concern that a liquidity event could have more catastrophic effects.

Now, you may not be directly involved in liquidity management in treasury but you should still have a firm grasp of the real-time situation and impact of liquidity in your institution, shouldn’t you? 

You’d want to know if your hypertension was putting you at risk, even if you aren’t an MD. The point is that liquidity crises are the overwhelming reason that banks fail, and the traditional measures and metrics used to monitor liquidity are simply not good enough anymore. 

How the rules of the game have changed and why there’s now more liquidity risk

In the Vietnam War, one of the jobs of the American infantryman was to check and clear holes in the ground called “foxholes”.

Armed only with a flashlight and pistol, the selected soldier would dive head first into a dark hole in the ground, hoping and praying that no enemy was waiting for him and that led to the aphorism, “There aren’t any atheists in a foxhole.” That became known as a “foxhole conversion”. 

In the financial sector these days we need a new aphorism: “There aren’t any capitalists during a liquidity crisis.” That’s because anyone who failed to escape with their funds before their bank collapsed is baying collectively for a state bailout

People want protection from losing their deposit,  but isn’t that the purpose of the capital requirements and other regulations?

We think that much like governments saying that speed limits aren’t “target speeds”, Basel III intraday liquidity regulations should be thought of as the minimum oversight and the minimum set of requirements to meet. 

Our goal shouldn’t be to meet the minimum reporting requirements because regulations are often made to prevent the last war. The next time is always for different reasons.

Our goal should be to have total insight and total control over the real-time liquidity position of our institution, every minute of the day, 7 days a week. You wouldn’t day-trade stocks and shares with month-old news, would you?

Liquidity is important enough to be discussed at the board level, so why isn’t it?

Technology is changing our world faster than it ever has before. It’s truly exponential development. 

Domestic payments now happen instantly. Cross-border payments are catching up. And, with the evolution of technology that plugs into existing infrastructure (APIs), developments of the underlying networks themselves, and the integration of blockchain and tokenisation of assets is only going to improve your clients and customers ability to move huge sums of money in and out of financial institutions, easily and effortlessly. 

Based on the changeable nature of the current environment, liquidity management is underrepresented in the measures of health metrics and success, especially when we consider what is discussed at the board level. 

How do you keep track of your real-time liquidity position using traditional methods when account holders can withdraw their deposits instantly, and how does one make decisions that affect the financial institution’s very survival while customers are attempting to withdraw $42 billion in a single day?

While we know that the next bank collapse won’t be the same as SVB or Credit Suisse, and will have its own unique characteristics, we also know what information banks will need to cope. That’s why throughout this blog series, we’ll be assessing aspects of liquidity regulation, risk management, data insight, and much more. 

There are major limitations to traditional cash and liquidity management systems and serious benefits to real-time solutions 

There are downsides across the board to the traditional approach. 

Reports are static, and out of date before they’re even published. The forecasts created from the reports are therefore pointless. And, while they do offer a snapshot of your firm’s financial health, back then at that one moment in time, making informed decisions from them is as good as throwing darts at a board and hoping for the best, which leads to idle cash, and higher borrowing costs for you. 

With modern technology tools based on machine learning, accessing, compiling, and exploiting the vast stores of data housed in financial institutions going back decades, we can analyse all of this historical data to make incredibly accurate forecasts of your real-time liquidity usage. 

Imagine the power that knowledge gives you. You can highlight potential issues or problems before they arise. An early-warning system for when things don’t go as expected. 

Similarly, it allows for efficient deployment and investment of your cash. We’re leaving an era of “lazy liquidity”. Parking your excess cash for a low (or no) fee is no longer an option. 

Rising rates mean unallocated liquidity is going to cost you a lot of money. But, there is a flip side. It also creates opportunities; your short-term interest rate traders can make your excess cash useful for the first time in over a decade, you can sell more long-term mortgages, and these are just a couple of examples. 

Technology is leaping forward, regulators are driving advances, so how does your business keep up?

As technology advances and regulations tighten, sticking to traditional liquidity management methods just doesn’t cut it anymore. Planixs ensures you’re not just keeping up, but actually setting the pace for what’s coming next.

In today’s rapidly evolving landscape, real-time liquidity management is a gateway to opportunities that can transform your back and front-office operations and open up untapped opportunities for growth.

Our suite of liquidity control and optimisation tools opens the doors to insights that can allow you to reimagine how your businesses operate. From enhancing revenue and reputation to ensuring resilience, compliance with regulations, and risk mitigation. 

We provide a goldmine of actionable insights that allow you to be a change-maker in your organisation. Whether colleagues are looking for solutions to risk or aiming to boost revenue, our tools open up all sorts of possibilities. 

So, do you know what your liquidity health score is right now?

As 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 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?

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