‘Shortage in liquidity will kill you instantly and excess liquidity will kill you over time’ is a well-known industry saying which serves as a very real warning to banks across the globe of the dangers of poor liquidity management.

These dangers are highlighted even more starkly by the waves of change that are washing over the banking world, ranging from Europe’s painfully drawn out debt issues to last month’s revelations that four major US banks failed their latest rounds of stress tests. All in all, banks’ liquidity management strategies (or lack of) are very much under the spotlight.

As emergency funding becomes ever prevalent in Europe with the hope of improved liquidity as directed by Basel III, banks face continued cost challenges and threats to long term reputational damage which are often, as we have seen, hard to recover from. With Dodd Frank on the horizon, which many believe will align with Basel III directives, pressures on bank liquidity management have never been higher.

These new market dynamics and burdening regulatory requirements are increasing operational challenges which if we look at in more detail, strongly support the business case for re-evaluation of liquidity strategies.

Historically banks have struggled with acquiring visibility of deviations on desired liquidity profiles which ultimately either result in a shortage or excess in liquidity. Without access to accurate and timely information, treasurers and cash managers struggle to identify and respond to these deviations as early as possible; this hinders the bank’s ability to capitalise on opportunities and mitigate against potential risks.

In order to improve this visibility, more and more real time, intra-day data has to be passed from the back to the middle and front office. This creates the challenge of increased back office costs, which the bank must mitigate against in order to safeguard future profitability.

Increasing optimisation of  business processes is the only real way that banks can overcome these challenges and acquire greater clarity on their ‘cost of cash’ – the precarious balance between protecting the bank and its revenue – to help ensure that coupled with achieving regulatory compliance, cash and liquidity reserve strategies support future growth objectives.

Banks that will successfully dodge ‘death by liquidity’, are those that are able to:

- Release strategic cash by optimising their liquidity buffer calculations and determining an appropriate liquidity strategy

- Reveal hidden cash by identifying intra-day surpluses or shortages in liquidity and rapidly responding to them

- Refine moving cash by optimising their business processes

Despite new liquidity requirements not being fully defined, banks that do not act will simply fall victim to their own lack, or surplus, of liquidity. Those that seek new ways to optimize liquidity provision and more effectively forecast future liquidity distribution will not only survive, but will thrive in the long term through enhanced business processes,. New tools which provide an agile foundation on which to ease compliance and generate more accurate and timely calculations are a game changing asset in transforming bank liquidity strategies. 

How far are banks in re-evaluating their liquidity strategies? How many are equipped both culturally and operationally to successfully manage their cost of cash?