All in a day’s work

Following the financial crisis of 2008-9, much of the global regulatory focus has been on ensuring that banks have stronger capital buffers to withstand future market stress. Certain riskier lines of business have been curtailed or discouraged, whilst the governance of other core banking activities has been reappraised, re-engineered and generally tightened up.

Intra-day liquidity monitoring and management falls squarely in that category. The US Federal Reserve Board defines liquidity as a financial institution’s capacity to meet its cash and collateral obligations without incurring unacceptable losses: “Adequate liquidity is dependent upon the institution’s ability to efficiently meet both expected and unexpected cash flows and collateral needs without adversely affecting either daily operations or the financial condition of the institution.”

According to Natalia Blatter, head of transaction banking product and market development, UBS, real-time liquidity management and monitoring has long been a well-established direction of travel in global transaction banking, notwithstanding the increase in regulatory attention since the financial crisis. “Although the definition of intra-day liquidity management may differ among financial institutions, there has been a definite change over the past decade in attitudes to such exposures,” she says. From a general assumption that everything would settle on the ledger overnight or reparations would be made in the morning, via overdraft charges, financial institutions have hitherto realised they need to be more proactive in their liquidity management approach.

Local differences

In addition to the liquidity ratios defined as part of Basel III, the Basel Committee on Banking Supervision, (BCBS) issued a paper in 2013 which detailed a number of liquidity monitoring tools with quantitative data requirements. The paper requires implementation by national regulators between 1 January 2015 and 1 January 2017. Although the reporting requirement is essentially retrospective, national regulators vary in the level of oversight they wish to exercise in order to ensure banks are able manage intra-day liquidity effectively. In the UK for example, banks are required to submit reports tailored to their own particular risk profile under the Individual Liquidity Adequacy Assessment rules set out by the Bank of England’s Prudential Regulatory Authority, but they must also conduct analyses that demonstrate their understanding of the liquidity risks they are managing.

The BCBS paper leaves a degree of provision to national regulation, leading inevitably to different approaches. In principle, its metrics apply to nostro and custody-related accounts and to the accounts banks maintain with high-value payment systems. However, national regulators may limit their application to currencies that represent 5% or more of the total liabilities of the bank.

Even such a limitation does not absolve a bank from tracking its overall liquidity position, since positions in other currencies may still need to be reported at an aggregated level. In addition, says Catherine Banneux, senior market manager, banking market at SWIFT, one of the required metrics to be reported is the top three peaks and troughs for each of a bank’s nostro accounts on a monthly basis. “To produce this, you need to track positions on a movement-by-movement basis, which is not a trivial exercise.”

Keeping pace

Have operational abilities kept pace with regulation? Real-time liquidity monitoring is an aspirational goal, determined by regulators, says Michael Knorr, head of payment and liquidity risk management at Wells Fargo. While Basel III set the direction of travel, many financial institutions are waiting for their local regulators to produce detail. “That hasn’t happened at the same speed everywhere,” he notes. With a deadline of January 2017, the fact that some regulators are yet to release their detailed requirements cannot be taken as reason to delay preparations. “Obviously, banks are not doing this just for regulatory purposes,” says Knorr. “In the meantime, banks have established intra-day data warehouses to capture the necessary information.”

SWIFT has a key role to play in making the requisite data accessible. “To support the BCBS requirements, SWIFT messages are the predominant source of data,” says Knorr. “Having a very clear best practice on the use of intra-day reporting messages is an essential tool that will enable banks to collect the necessary data to support the regulatory requirements across different jurisdictions.”

Since the issue was discussed at Sibos 2015 in Singapore, has the industry been able made the progress it should have? “Personally, I would have assumed more defined requirements, but regulators have had to focus on other issues,” says Knorr. “However, the Liquidity Implementation Task Force has recently started to work on the next version of market practice guidelines and is considering whether to elevate these to service level agreements.”

Business benefits

For Blatter, while regulation may have been a spur, the wider business benefits of better liquidity management are placing the subject firmly at the top of the agenda for many banks. “The optimisation of liquidity involves different measures, including knowing where our cash is and how much it costs us to have it there. We’re now aware of the costs of our intra-day balances,” she says.

But can banks derive commercial benefit from closer intra-day liquidity monitoring? It all depends of how they leverage the information, says Blatter. “If we treat it as another regulatory compliance tick-box, then no. But these tools have provided transparency, which we did not have as an industry until very recently. That transparency drives a totally different dialogue among the providers and consumers of intra-day lines.”

Find out more from industry experts at the ‘ Real-time liquidity monitoring and management: Do banks still have the choice ?’ session, taking place on Thursday 29 September at Sibos 2016 Geneva.