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Visibility and control: the liquidity management mantra

Liquidity has moved further and further up banking executives’ agendas thanks to the growing industry focus as well as regulatory demands for more liquidity to be available in banks. Following the 2008 crash, liquidity has established itself as a risk concern for banks like never before – the failure of Northern Rock was essentially one of liquidity not funds. As a result, liquidity management strategies continue to be at the forefront of any strategic risk plan.

A fundamental challenge for banks is that increasing amounts of liquidity are needed to support clearing and settlement, customer business flows and regulatory requirements. This is happening in parallel with rising costs of cash and high quality collateral while supply remains restricted. To illustrate the extent of the issue, it’s been estimated that European banks will need approximately €2 trillion in qualifying assets to meet new regulatory requirements.

As liquidity is a key resource, banks are reforming their liquidity operating models so that systems give real-time visibility to liquidity information. Visibility and control is now the mantra for effective liquidity management. This trend for visibility and control meets its greatest challenge in the supervision and management of currencies that are cleared and settled indirectly through agents. Pressure is rising from regulators and central banks for banks with significant cash flows to be direct members of clearing and settlement systems. Changes to risk policies and pricing among leading settlement banks are also driving rationalisation of correspondent banking models and arrangements. Large networks with replicated capacity are being trimmed down and demand is growing for improved intraday information services.

As many bank departments use liquidity on a daily basis, there must be enhanced controls in place and banks must demonstrate active management, allocation and pricing of liquidity. In addition, the payment processes that handle intraday cash flows must provide real-time control over scheduling and exposure to external accounts and counterparties. Banks must take steps to adjust their liquidity management strategies or risk being hit by expensive collateral costs or unfavourable liquidity risk profiles.


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