The management of intraday liquidity – defined by the Committee on Payment and Settlement Systems (CPSS) as “funds that can be assessed during the business day, usually to enable financial institutions to make payments in real time” – is now in the spotlight. Sources of this type of liquidity include central bank reserve balances, liquid assets on the balance sheet, payments received and balances with other banks that could be used for same-day settlement.  

Historically, banks tended to manage their payment flows with a view to ensuring that they end a given day flat, so that the value of incoming funds is equivalent to the value of payments leaving the bank. However, risks associated with end-of-day netting systems for settlement of interbank payments became an area of concern as the volume of payments increased. In times of sustained market volatility and liquidity stress, the potential for timing mismatches between incoming and outgoing payments — given the size of some of these exposures — exposes individual banks to significant intraday liquidity risks. These risks like counterparty and settlement risks could be potentially damaging to even the largest institution, and a potential source and channel of contagion for the global banking marketplace.

While there appears to be a general consensus that addressing intraday liquidity is critical to the health of the global financial system, there is also a concern that the proposed requirements present significant opportunity costs to banks that could negatively impact the global economic recovery. Consider the point of view of a major global bank that is required to provide regulators with intraday liquidity information from all of its payment systems, across all of its business lines, in diverse jurisdictions around the world. Moreover, in order to perform intraday liquidity calculations, a bank would need more specific information on each transaction (for example size of transaction or time of clearance) than would be traditionally available to a bank’s risk systems. For example, while end-of-day liquidity reporting requires an aggregate view of all cash inflows and outflows, intraday liquidity risk reporting requires data at a more granular level.

Here are the some of the challenges which bank will be facing while implementing Intraday Liquii

Delivery on Time: As recommended Financial Institutions (FI) need to start intraday reporting to commence on a monthly basis from 1 January 2015. This means FI’s need to implement all the changes to their liquidity systems and framework in very short time (6 months from now).

Data Integration: FI need to bring data from large number of back office systems spreading across different business lines which need to be integrated and processed in a timely manner. Thus FI need some strategic reporting solution which can be changed with changes in the back office/regulatory changes.

Operating Model: We will have significant overlap of finance/treasury data requirements and thus FI need to define well in advance operating and governance model between the different departments for effective and accurate production of regulatory reports

Sign off from Business: Regulators has indicated in the regulations senior management is responsible for accuracy of the report data and thus business need to prepare test plans/data so that they can signoff prior to going live.

Stress Testing: FI need to have different models for different scenarios depending on bank’s business and even decide the risk factors. Thus they need to build in house stress capabilities for different business scenarios which includes creation of appropriate data and models. It will be on top of the regulations for stress testing which is already issued.

Disclosure: I wrote this article myself and it express my own opinion