Q&A: SmartStream on the Importance of Intraday Liquidity

In 2013, the Basel Committee released its Monitoring Tools for Intraday Liquidity Management. Reporting on a monthly basis could come as early as 1 January 2015, to coincide with the Basel III Liquidity Coverage Ratio, and banks need to be ready. gtnews spoke with Nick Noble, product manager for financial software provider SmartStream, which has been helping banks prepare for the inevitable intraday liquidity requirements.

Q (gtnews): Given the significance of intraday liquidity risk, why is it only now gaining attention?

A (Nick Noble): The financial crisis and collapse of Lehman Brothers where a stark reminder of the consequences of mismanaging intraday liquidity risk. Although banks have always sought to get a better handle on their intraday liquidity risk, the drivers of late have been regulatory. They now have the opportunity to implement better monitoring and controls because the regulation is targeted at addressing this risk, which is currently not being managed as well as it could be.

In 2013, the Basel Committee introduced its Monitoring Tools for Intraday Liquidity Management, which aim to help national banking supervisors better monitor internationally active banks’ management of intraday liquidity risk. Can you talk a bit about the tools? Which ones pertain to which banks?

They’ve basically come up with seven tools that will help the banking regulators gain visibility and understanding about the management of intraday liquidity within their jurisdictions. Those tools are combined to establish a reporting framework for banks based on three different perspectives of participation in the cash settlements process.

Four of the tools are applicable to all reporting banks:

  • Daily maximum intraday liquidity usage
  • Available intraday liquidity at the start of the business day
  • Total payments and
  • Time-specific obligations.

There are two tools that are applicable to banks that provide correspondent banking services to other financial institutions:

  • Value of payments made on behalf of correspondent banking customers and
  • Intraday credit lines extended to customers.

Lastly, there is one tool that’s just specifically designed for banks that are direct participants in the payment systems within their local markets: intraday throughput.

So it’s a mix of different tools depending on what settlement accounts are used or correspondent banking services are provided.

How do you see the tools impacting correspondent banking relationships?

There is pressure on the correspondent banks to supply accurate and consistent information related to cash settlement whether via SWIFT messaging or other agreed protocols.

There are also dynamics that will change in the relationships and the business services they provide. The cost and the use of intraday liquidity will be under increased scrutiny as a consequence of its increased visibility. People are getting more visibility on what intraday liquidity is being used, with which correspondents, and what intraday liquidity is being offered and consumed by counterparties in the market. As banks gain more visibility into how they’re using and offering intraday liquidity, it could very easily lead to some changes in the business practices of how the participants interact with each other.   

How much do you see this enhanced visibility into banks’ intraday liquidity risks benefiting their large corporate clients?

The tighter handle a correspondent banking provider has on intraday liquidity, the more they will generally be seen as a stable and robust partner that keeps their corporate clients happy and provides the level of service they’re expecting.

What kind of preparation are you seeing from banks, overall? What advice would you give to banks that have minimal visibility into their intraday exposures?

We’ve been speaking to many different banks across the globe on this topic. What we’re hearing from our clients is, they don’t just want to tick the box because regulators are saying, ‘You need to provide us with a report.’ They want to be sure they have the right technology and the right framework in place so that they can start managing their intraday liquidity more effectively and have better visibility of it. They don’t want to be left behind the curve as other organisations invest and move forward to implement these tools and put better operational practices in place. They want to be on the same level, because the way intraday liquidity is being consumed, priced and offered could change quite rapidly over the next few years.

If you don’t have any visibility into your intraday liquidity, then you could, quite quickly, not be participating on a level playing field with your peers and competitors. Therefore, you could be hit with additional liquidity costs if you’re not managing intraday liquidity properly or if you’re not able to rationalize your liquidity and who you’re using it with. So you very much want to be ready to not only tick the regulatory box but also make sure that you’re in step with the market.

With so many banks upgrading their technology and making preparations, do you think that the majority of them will be ready when the reporting requirements eventually kick in (rumoured to be 1 January 2015)?

There are many challenges in implementing these tools. The appropriate level of information isn’t widely available at the moment, and regulators appreciate that it’s not necessarily an easy task to return these reports. So what we’re seeing is that there’s likely to be a staggered approach to actually completely fulfilling the regulation. We’re seeing the local regulators speaking with the banks and making sure they have a program and a strategy in place not only to provide the reports but also ensure they have the ability to manage intraday liquidity responsibly and have the ability to identify and react to any intraday liquidity stress scenarios.


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