The treasury and operational functions of financial services organisations need to have the right infrastructure in place to make sure money moves around as efficiently as possible, to support their various business activities. Read on and find how intraday liquidity can support your treasury function.
This infrastructure could include accounts for large-value payment schemes in key currencies, correspondent bank nostro accounts for other currencies, accounts for securities clearing houses and so on.
And to create the right kind of infrastructure, banks and other financial institutions need to adopt the right technology and operational processes. Plus, of course, they need sufficient liquidity to support timely payment.
Life after the end-of-days
This is nothing new. Over the centuries, banks have evolved ways of working to match the technology available at the time. But prior to the past decade or so, most firms regarded their infrastructure and account deadlines as “end-of-day”.
No one felt too concerned about tracking details during the day. As long as everything they expected to happen, happened by end of play, it was all good. Intraday liquidity positions were never given a second thought.
So, what happened?
The rise of intraday liquidity
The global financial crisis of 2007-2008 showed us that intraday liquidity does matter after all. If you don’t have enough liquidity during the day, counter parties won’t pay you until you’ve paid them, and no one in the market wants to give you credit lines because they think you’re a bad risk, then you’re not likely to last too long. The collapse of Lehman Brothers is a real-world lesson in how the inability to access credit during the day can rapidly take you down.
Not surprisingly, regulators are now pressurising banks to understand, report and manage intraday liquidity, and to make sure they’ve set aside a realistic financial buffer to cope with unforeseen issues.
Outside the world of banks’ treasuries and operations, things are also changing. Now, customers and businesses are used to real-time transactions like Instant payments. In some countries, they’re already an integral part of conducting business. In North America, there’s the U.S. central bank’s instant payment service, FedNow, and in Canada, the Real-Time Rail payment system — both set to launch soon. And crypto currencies, which allow value to be transferred almost instantaneously.
This combination of regulatory pressure and having to move liquidity much faster means that banks need to examine how they actually manage intraday liquidity.
What does real-time intraday liquidity look like?
It’s about understanding what’s happening this instant (in all the accounts the bank is active in) with a single dashboard providing total visibility and supporting analytics. It enables the firm to compare predictions with what’s actually happening. If expectation and reality are at odds, experts can manage the risk as it occurs — all in real time, every minute of every day.
To achieve this, you need the right technology and an operations infrastructure that’s able to bring together views of all your account activity in real time.
Then you can move your cash liquidity and securities collateral around as necessary to support your business. If you don’t like the look of what’s driving your intraday liquidity usage, you can apply incentives to change the pattern.
The benefits of real-time insight
You can use this real-time information to make better decisions; to spot which counterparties aren’t paying and creating shortfalls on your accounts or, perhaps, which trades might be failing, enabling you to act so you’re not left with an expensive headache.
It could improve relations with the regulator and reduce the cost of funding, because your heightened insight ought to mean that you and colleagues make fewer mistakes. You might only need smaller, less expensive buffers, because you’re not using as much liquidity during the day and your short positions are smaller. You can recycle liquidity around your various accounts of interest, and you’ll have happier colleagues and customers because payments are happening when they should, with less effort wasted on chasing a paper trail.
See treasury liquidity from new angles
That said, liquidity problems aren’t always about the lack of ready cash — it can work the other way. For example, in March 2020, one particular clearing bank faced an unusual challenge when the COVID crisis escalated. Instead of money leaving accounts, customers began depositing much more cash. The organisation found that its central bank balance was unexpectedly very long and they were being taxed for holding large deposits (some central banks have negative interest rates or even banking taxes on excess deposits). As the cash flooded in it was, in fact, actually costing them money to hold.
With intraday insight you can spot that kind of thing and act quickly. There’s an optimal balance of interest rates and liquidity flow, and intraday insight enables you to make appropriate and timely adjustments.
The potential payback from attaining real-time intraday liquidity is massive. Often these programs are initiated by regulatory pressure. But as you solve problems you could easily find that, by significantly reducing your cost base and enabling new capabilities, the project pays for itself within months.
Make intraday liquidity a reality
Achieving real-time intraday liquidity is complicated; it involves managing and rapidly analysing mountains of data at a very granular level. Which begs the question, can you get the right data? Can you put it where you need it? Is your technology precise and powerful enough to turn data into real-time insight?
Making it happen requires a cross-organisational change program, involving treasury and operational functions, as well as the business teams who manage your customers. And you need buy-in from the technology, governance and regulatory teams, too.
Complex change projects are always difficult to get started and drive to completion in the face of competing agendas. However, firms that find the right leaders and c-suite sponsors to act on behalf of the whole organisation — in short, those that get it right — are very quickly enjoying extra business value.
Keep your feet on the ground
But you need to be pragmatic — many different parts of the organisation will be involved and you’ll want cooperation from all of them. I mean, you might know the data you need is in your system, but extraction might have to wait 6 months until there’s a suitable slot in your internal tech team’s book of work.
One way around this is to roll things out in phases. You don’t have to wait until everything’s ready to get incremental improvements. Simply choose which parts of your infrastructure to move into the new world first.
If you’re thinking you can’t afford to implement the right technology solution, think again. Today, you can harness technology that’s already available in the cloud — scalable compute power and the ability to ingest and process huge data volumes – just what you need.
The thing is, you don’t have to build your own intraday liquidity solution from scratch. The industry-proven software platform to do all this is available off-the-shelf and implemented to your specific requirements. To find out more get in touch and speak to one of our treasury experts.
