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Midsummer reflections on Intraday Liquidity: five takeaways & five recommendations

Midsummer

We are approaching summer holiday season, in the Northern Hemisphere at least, and I thought it a good time to call out some interesting intraday articles that I’ve seen over the first half of 2019. I've identified four useful documents to read, plus one I suggest you avoid completely. I thought it would be helpful to start by picking out some summary (or should that be summery?) takeaways before linking to the actual documents.

Five takeaways

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1) Intraday costs are increasing and becoming more widespread

When I began my intraday journey, I would often find firms who claimed that intraday liquidity was ‘free’ for them (credit lines were ‘free’ and no-one charged intraday interest). This attitude ignores the wide range of financial benefits from improving insight in real-time throughout the day e.g. the funding process becomes much more efficient and funding costs are optimised. And now we are starting to see explicit costs applied to intraday usage, most notably from US correspondent banks. Central banks are charging for intraday, large correspondents are getting sharper at understanding which customers are driving their intraday usage and this cost is being passed on to those customers. Such customers are either being charged for credit lines and/or actual liquidity usage or have to collateralise their positions upfront.

2) Regulators are becoming more active

Regulators are increasingly asking questions on intraday. There is still an interest in BCBS248 reporting (https://www.bis.org/publ/bcbs248.pdf) but the sharper regulators are more concerned with testing a bank’s capability to manage in real-time and are demanding expensive intraday liquidity buffers to cater for intraday risks.

3) 24/7 is having an impact

The move to faster and instant payments is having a major impact on banks' attitudes to intraday. Bank customers expect to be able to move money in real-time any day of the week. Liquidity becomes more volatile and such volatility extends outside 'normal' hours i.e. normal working hours and opening hours of central clearing systems. This creates a knock-on expectation for a bank treasury to be able to manage the bank’s liquidity in real-time. After all, the alternative would be to overprovide liquidity into markets, just in case out-of-hours activity drains the liquidity of the bank.

4) Business case is solid and becoming better understood

There are various elements that make up the business case for improving intraday capabilities. These include reducing the size and cost of liquidity buffers, optimising funding costs and improving client service. Business cases are increasingly well-understood and are becoming more compelling as leading banks set the standard and regulators raise the temperature on intraday.

5) No need to boil the ocean

Business cases are identifying huge benefits but also significant costs and effort in delivery. Helpfully though, there are many things that can be done quickly which unlock benefits, including financial savings to pump-prime further investments. Banks can start to improve intraday now while working on the hard and time-consuming steps needed to complete the journey to full intraday maturity.

Five recommendations for further reading

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Useful document No. 1 comes from BAFT, an industry group working on behalf of banks worldwide. BAFT has worked in the intraday space for some years, helping to define the banking community’s response to the intraday agenda. Its latest publication explains how banks are progressing with intraday and the issues they face. The document and accompanying survey is focused on banks in Europe but has relevance to banks in all geographies.

https://www.baft.org/about-baft/news-and-press-releases/2019/05/31/baft-publishes-industry-briefing-intraday-liquidity-management-in-europe

Useful document No. 2 comes from Accenture and is one of three thought pieces recently issued by consultancies. It provides a good summary of intraday and why it’s a different challenge compared to end of day. Although Accenture appear overly daunted by the challenges of acquiring intraday data, they do a good job of explaining how to roll out to full intraday capability and the benefits of taking a staged approach.

https://www.accenture.com/us-en/insights/financial-services/intraday-liquidity-management

Useful document No. 3 is from Boston Consulting Group. With a strong background in strategy, it’s no surprise that BCG take a broader look at intraday; their publication, Creating a Digital Treasury in Banking, extends the analysis into how digital capabilities are driving new opportunities for Treasury. I support this thinking and how ‘intraday’ is actually just one component of ‘real-time’ treasury. Soon we will talk about ‘real-time’ capabilities and how banks with the ability to act in real-time can now properly address intraday liquidity, cash management, immediate funding etc. There is some good material in here that explains different levels of intraday maturity and how technology and good quality data can improve a range of capabilities.

https://www.bcg.com/en-gb/publications/2019/creating-digital-treasury-banking.aspx

Useful document No. 4 is a shorter read and is from Baringa Partners. It provides a speedy overview of the costs and benefits relating to intraday. Of particular note is their approach of getting started now and using the immediate savings to finance longer-term investments required for full intraday capability.

https://www.baringa.com/en/insights-news/points-of-view/intraday-liquidity-pay-your-own-way/

Recommendation No. 5 is to NOT waste time reading the latest progress review from BCBS on the global adoption of regulations. As I’ve commented previously (https://www.linkedin.com/pulse/bcbs-how-review-intraday-liquidity-progress-pete-mcintyre/) the analysis on intraday liquidity (and BCBS248) is at odds with what is actually happening on the ground. For example, according to the analysis, all relevant banks in Canada and the European Union are fully compliant with BCBS248. This will come as a shock to many of the banks I speak to on a regular basis in those parts of the world. The document is here if you really have time on your hands... https://www.bis.org/bcbs/publ/d464.pdf

Final thoughts

It is interesting that in a relatively short space of time, a global industry group plus a number of highly respected consultancies have chosen to focus on intraday. If scarce business development time is being invested in writing about this area, it is because there is money to be made in the intraday arena. I see this as a good indication that banks are taking intraday seriously and that intraday is a maturing capability.

I hope you found this a helpful summary of movements in the intraday world. Keep checking back for new posts and please give your thoughts below.

(Make sure you don’t miss out on similar articles and more information on Intraday Liquidity by visiting planixs.com.)

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