Liquidity Risk Management: Challenges at Hand

The financial crisis highlighted important gaps in liquidity risk management that have led a large number of financial institutions to improve their ability to face potential future crises and prepare for more stringent liquidity risk regulations. Indeed, 80% of respondents to a recent SWIFT survey1 said they had started a project in this area.

Most institutions have already initiated their ‘top-down’ liquidity risk review. This typically starts with governance, defining their liquidity risk tolerance and appetite as well as their liquidity risk strategy, modelling their stress tests, defining their contingency funding plan, trying to enforce a firm-wide risk culture through liquidity transfer pricing mechanisms and rewards for risk policy-compliant practices.

Risk managers also see the need for a more proactive collaboration with the businesses to review the business strategy and portfolio, which leads banks to concentrate on the more profitable businesses under the new regulatory rules. Focussing on customers, knowing them better through behavioural analytics, using score cards and applying the right pricing will become essential to define and support business targets and decrease dependency on wholesale funding.

Banks now also take a more holistic approach to liquidity risk, as a consequential risk arising from operational, credit or market risks. A good example is the US Dodd-Frank Wall Street reform and Consumer Protection Act that will affect banks’ operational and liquidity frameworks and could have a financial impact through higher capital requirements imposed for over-the-counter (OTC) derivatives.

Finally banks are initiating projects to enhance their liquidity operations to comply with new regulations with a focus on intra-day. The SWIFT survey reveals that 66% have started a project at the foundation level of operational liquidity with the aim of not only addressing regulatory requirements but also better serving customers, who are asking for more transparency on their liquidity positions.

For transaction banks, the focus is on the ability to respect payment and settlement obligations for a smooth functioning of the payments and systems as a whole as well as for the effect on counterparties’ liquidity position. The role of payment infrastructures will be essential and banks are expecting more of them to provide liquidity savings mechanisms.

However beyond processes and organisational improvements, implementing liquidity risk strategy and all its required changes poses an important data management challenge that needs to be tackled bottom-up2. Needs for data at multiple levels of aggregation (transactional, product, business line, legal entity and firm-wide level) are significant to support the daily cash and liquidity management and reliable stress tests, comply with the regulatory reporting, enhance liquidity services to customers and develop alerts based on specific thresholds.

So, banks are building transactional databases and liquidity dashboards to better monitor positions and support the need for historical data and analytics. In doing so they are facing a number of issues:

  • The need for integration with the numerous front and back-office applications.
  • A lack of automation of underlying operational processes.
  • A lack of data interoperability along the transaction life cycle.
  • The need for industry business practice.

To give an order of magnitude, according to a recent survey by Aite Group and Sybase, only 5% of liquidity risk management (LRM) data is gathered with automated systems and processes.

These issues are affecting banks ability to fulfil the needs at the different levels of liquidity risk management answering key questions at business, treasury and risk level.

Intra-day Position Management

Many banks are building a liquidity dashboard to comply with the need to monitor their liquidity position on a real time basis. However they still have issues assessing their intra-day settled and predictive positions in a reliable and timely manner as well as their customers’ positions.

Internal cash projections, based on payment flows, are not sufficiently accurate and, on average, the share of transactions reported on the same day by nostro agents is quite low. Indeed 60% of SWIFT survey respondents have less than 50% of transactions reported intra-day. As a result, banks are exposed to the cost of intra-day credit lines and overdraft charges. It is therefore not surprising that 90% of survey respondents want more transactions to be reported more frequently. Finally, very few payments infrastructures have deployed advanced real-time reporting at banks and customers levels and provide payment flow control capability.

On the predictive side, banks are building integration with their back or front office systems to improve monitoring of all commitments made across business lines. However, in many cases treasurers don’t have a view on the customer’s transactions that have not been originated by their front offices and which could have an important impact on their liquidity. There is no or little business practice on the usage of payment advice instructions (e.g. from corporate customers) or trade notification messages (e.g. from a central counterparty clearing house (CCP) to its clearing members) that would enable for a better assessment of the funding needs along the day.

Finally, depending on the bank’s business model, monitoring of the unencumbered collateral position on an intra-day basis might be challenging, especially when it involves a large volume of margin calls because of the lack of process standardisation and integration.

Global Position Management

New regulations require the ability for a financial institution to manage its liquidity position and report at a firm-wide level, including all its branches and subsidiaries. More and more banks are centralising their treasury management to comply with these new requirements and improve their global liquidity risk management providing an answer to key questions, such as: how can I optimise liquidity across entities and reduce the need for local buffers, what should be the liquidity transfer pricing for my entities given their status of providers or users of liquidity.

On the liquidity services side, banks are looking for end-to-end transparency on their cash flows at a global level to better serve their customers. However, collecting accurate and timely information on their branch positions can be challenging, especially if these have not implemented intra-day reconciliation.

A centralised and integrated treasury system is an alternative that some banks may choose, however this will be a long and costly project. It may also raise issues for countries with restrictive regulations on data privacy. No wonder that almost 70% of the survey’s respondents referred to the difficulty in getting this global view.

The Need for Analytics

Analytics and business intelligence on a daily and historical basis is the cornerstone of liquidity or business decisions, risk monitoring and regulatory reporting. The scope of requirements is very broad, ranging from a concentration analysis of liquidity exposures to a view on the average daily peak of liquidity usage or an historical view on liquidity flows to help monitor deviations and define alerts based on defined thresholds. Liquidity services on their side will underpin their business plans with benchmarking and market share evolution analyses.

Very few institutions have already developed a ‘one click’ capability to run these analyses at both group and individual entity level across or by type of currency. 87% of the SWIFT survey respondents said they need more ‘ready-made’ analytics as alternative or complement to integration processes.


Compliance with new regulations and implementation of new liquidity policies will substantially impact banks across business lines and geographies. The lack of information is a key issue in the overall liquidity chain that prevents payments, treasury and liquidity risk managers from reaching their goals. An industry-wide collaborative approach can complement the work at an individual level and ensure more consistency in the implementation, thereby reducing costs and improving efficiencies.

SWIFT says its services help banks support their liquidity risk management in the following ways:

  • Obtain a view on intra-day liquidity, by receiving SWIFT intra-day cash and collateral reports more frequently.
  • Enhance real-time gross settlement (RTGS) liquidity management, by using SWIFT’s RTGS service portfolio.
  • Build a firm-wide view on liquidity positions, by using SWIFT’s FINInform copy service to monitor cash movements and liquidity positions of branches.
  • Improve predictive collateral position management, by using SWIFT’s new margin call standards.
  • Streamline clearing and settlement of off-exchange equities and trades by directing matched trades through Accord for Securities with a number of CCPs and by using the new standards developed for the communication between the global clearing members and the CCPs.
  • Perform liquidity and counterparty risk analysis and business intelligence, using SWIFT’s new Watch Value Analyser.
  • Benchmark liquidity services, assess processes and support integration projects, by using SWIFT’s Consulting Services.

SWIFT has recently launching its 2011 liquidity risk survey.

1 Market research: Managing liquidity risk: industry pain points and SWIFT solutions.

2 White paper: Managing liquidity risk in a changed and global world.


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