When SWIFT recently released the results of a survey on banks’ progress in developing the intraday liquidity monitoring and reporting tools recommended by the Basel Committee on Banking Supervision (BCBS), the results were sobering.
The BCBS had stipulated in its recommendations that banks be ready to do intraday liquidity reporting by January 1, 2015. By December of 2014, however, only one-third of the 150 internationally active banks SWIFT surveyed had started implementing a solution. Another third was in the evaluation phase. And a full 32 percent of respondents had done nothing at all.
While this sounds extreme, a closer look reveals a number of reasons behind these delays.
First of all, the BCBS recommendations gave regulators leeway to extend implementation through January 2017, meaning many banks are technically not behind schedule. And while in a few cases regulators have turned the BCBS recommendations into legally binding rules, a great many have not, leaving banks in the dark.
This has put banks into something of a quandary. On the one hand, they are being asked to implement requirements on a tight schedule. On the other, there is no clear regulatory compass pointing the way forward. Banks also naturally worry that if regulators do not coordinate among themselves it could lead to inconsistent, and in the worst case conflicting, rules.
Yet despite this uncertainty and the missed deadlines, it would be wrong to say that no progress has been made. On the contrary, some banks have implemented initial solutions, and banks have formed industry working groups so that they can meet and discuss standards and solution patterns. Many banks, including UBS, are also closely collaborating with their regulators to mutually understand and align expectations.
Focus on your breath
Certainly no one, at least these days, is underestimating the importance of the issue. After all, liquidity is to banks what oxygen is to living organisms: if it is not available, the bank quickly dies.
While concerns about the systemic risks of bank liquidity are hardly new, regulators have historically not focused on intraday liquidity. Rules like Basel III’s Liquidity Coverage Ratio (LCR) or its Net Stable Funding Ratio (NSFR), for instance, are both designed to ensure that banks have sufficient liquidity, even under stressed scenarios, over a mid- to long-term time horizon.
After the Lehman collapse, which was a poignant reminder of how liquidity bottlenecks in one institution can threaten the whole system, that changed. With the BCBS’s “Monitoring Tools for Intraday Liquidity Management,” published in April 2013 and developing ideas set out in its “Principles for Sound Liquidity Risk Management” of 2008, the focus has now squarely been put on intraday issues.
This is a very important part of the liquidity puzzle. As money flows in and out over the course of the day, an individual bank’s liquidity position can rise and fall dramatically. Any interruption, any hiccup, can resonate quickly through the whole system.
Much like a person learning to meditate is taught to focus on his or her breath, the BCBS recommendations prescribe methods for banks to monitor and anticipate their intraday liquidity positions and needs under normal and stressed scenarios. As beginning meditators will tell you, however, maintaining such focus is not always easy. Banks find themselves challenged on many fronts.
Harder than it looks
One of the biggest difficulties is consolidating internal and external data streams. The industry has historically been set up for end-of-day reporting. Getting the data for intraday purposes is not trivial, nor is setting up new systems for it. Banks also have to consider funding and collateral needs as well as used and available credit lines against their daily payment flows. They need to maintain an overview of all dependencies across time and currency zones, a difficult task particularly for large, globally oriented organizations. They should also be able to identify potential liquidity bottlenecks, which, in a complex network of clearing systems and nostro connections, can cause problems within a single bank or even be propagated from bank to bank.
Complicating matters, at the moment there is no agreed data standard among banks that would support an overall market approach. Here, suppliers of correspondent banking services are doubly challenged: they have to meet the requirements of their own regulators as well as support their clients in fulfilling the regulatory demands of their clients’ individual jurisdictions. Banks are increasingly concerned when these requirements are not yet clear or inconsistent across jurisdictions, as they do not want to invest in a wide range of different solutions.
Clients have their expectations too. Just as a mountain guide leading an expedition up to altitudes where the air is thin is expected to have oxygen available, clients expect their banks to be prepared for all eventualities when dealing with intraday liquidity. Banks need to be ready.
An opportunity in the making
Monitoring intraday liquidity is, however, not just a regulatory burden. It can also been seen as a business opportunity, as the data could prove very valuable in helping banks better understand and manage their positions.
In the current environment, such management has become more important. For example, the phased-in implementation of Basel III’s LCR and the leverage ratio will increasingly put pressure on balance sheet usage. A flexible and optimized intraday liquidity management regime can help banks use the ever scarcer resources of their balance sheets more efficiently.
The introduction of negative interest rates in certain currencies has also meant that positive end-of-day balances on liquidity lines, at least in these jurisdictions, now generate additional costs. That makes it increasingly attractive to keep overnight balances as lean as possible, and absorb as much liquidity fluctuation as possible using intraday overdraft limits. Given the increased importance of intraday liquidity, however, some market participants say it is only a matter of time before the first banks start charging for these overdrafts. Clearly those banks who can best manage their intraday liquidity, successfully navigating such competing demands, will have an advantage.
“Monitoring intraday liquidity is much more complex than it seems.”
“Monitoring intraday liquidity is much more complex than it seems.”
Finally, banks must keep clients’ needs in focus, and this remains the processing of payments. Although intraday liquidity may become more scarce for banks, clients will likely only be willing to pay for such liquidity when intraday timing brings a clear advantage. It is an open question if the market will accept fees for the use of intraday liquidity in general.
The key is for banks to look at the problem from as broad a perspective as possible. By being proactive banks can get ahead of the curve, helping contribute to a safer financial system and potentially profiting themselves along the way.