By optimizing their management of intraday liquidity, financial institutions can avoid the hidden costs associated with not managing and forecasting their cash and liquidity requirements correctly. Why maintain unnecessarily high levels of collateral or borrow at the last minute, when the liquidity needed to fulfil your settlement obligations can be sourced from other parts of the business that are not so constrained?
A whitepaper from SmartStream, a financial transaction management software provider, explores each of these points and discuss the opportunities that financial institutions can take to transform the intraday liquidity discussion, from one of an operational burden into one that adds true business value. It will also look at how institutions can leverage next-generation technologies like cloud computing, artificial intelligence and machine learning to achieve the goals that have long eluded them: real-time pro-active management of their global intraday liquidity.
During the financial crisis of 2007–2008, financial regulators quickly realized that the financial institutions under their supervision needed to do a number of things differently if they were to minimize the chances of a crisis of this scale happening again. The crisis brought home a number of weaknesses in the global financial system, in particular the scale of the impact arising from the interconnected nature of liquidity. If one or more ‘systemically important’ financial institutions could not access liquidity to fulfil their payment and settlement obligations, then a liquidity shortfall in one market, or one institution, could quickly spread to markets and intermediaries in other jurisdictions.
In 2008, the Basel Committee on Banking Supervision (BCBS) published its seminal Principles for Sound Liquidity Risk Management and Supervision, which underlined the need for banks to “actively manage their intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis.” That paper reinforced that global financial regulators want to see financial institutions moving beyond reporting their intraday liquidity positions (even with greater frequency) towards active management and control of their intraday liquidity.
Nadeem Shamim, head of Cash and Liquidity Management at SmartStream, said in a statement: “While this may seem to be another exercise in regulatory compliance, active intraday management offers a competitive advantage in the changing regulatory landscape. It provides added benefits to both banks and their customers. In the past, intraday liquidity management was a nice to have, but this has moved to a ’must have’ and the trend is to optimize the management of intraday liquidity, from a cost perspective to a potential revenue generating exercise. This typifies the kind of discussions we are currently having with our customers on a daily basis”.
The paper reviews the regulators’ views and the monitoring tools available, including stress testing scenarios. Additionally, the value drivers suggest that whilst meeting regulatory obligations is undoubtedly front and centre for most financial institutions, the ability to manage liquidity intraday and to stress test liquidity demands are not simply a matter of regulatory interest. There are considerable business optimization opportunities that can come from having a strengthened intraday liquidity framework. Finally, the paper discusses the current status of where banks are now with their monitoring of intraday liquidity.