Anyone in our industry involved with the management or reporting of intraday liquidity knows that the years after the financial crisis were stormy ones.
For one, the introduction of negative interest rates – which made it expensive for banks to keep client cash on their books – turned many of the assumptions of liquidity management upside down. Banks had to rethink their approaches.
For another, when in April 2013 the Basel Committee released its “Monitoring tools for intraday liquidity management” guidelines, banks found themselves obliged to build new systems and capabilities to monitor and report their intraday positions.
This required significant effort. Banks had to deal not only with the complexity of their correspondent networks and the systems involved, but also with a fair amount of regulatory uncertainty – while the Basel paper specified the high-level monitoring requirements, it was up to local regulators to clarify the rules in each jurisdiction.
Despite these hurdles, by the end of 2015 banks by and large had managed to build the tools needed to provide the reports. Since then, there has been little further guidance from the regulatory side.
Does this mean that they can tick the box on intraday liquidity?
I don’t think so.
The lull before the storm
While things have been quiet around intraday liquidity, I believe this is just a lull before the next storm.
For one, there are signs that regulators may get active again. This is already the case in the UK, where the Prudential Regulatory Authority continues to issue additional requirements, including more detailed and higher frequency reports. It's possible that other regulators will follow this lead.
This could mean any number of things for banks, including requirements for daily reporting or new rules on managing intraday positions – potentially in real time. Should such requirements emerge, banks would have to invest in upgrading their systems or change the way they manage their liquidity operationally.
Another reason banks may want another look at intraday liquidity is its new potential as a source of revenue.
That’s because the tools banks built to meet the requirements of the Basel recommendations have resulted in a whole new level of transparency among correspondent banks.
Today the industry is aware, in ways it was not before, that liquidity is a limited good and comes at a cost. And where there are clear costs, there are – at least potentially – fees.
That said, being able to implement new business models around intraday liquidity will require banks to address a number of thorny issues.
- Internal pricing. Currently banks don't as a rule allocate liquidity costs internally on a product and/or client group level. This new transparency may prompt many to start doing so, putting an internal price tag on intraday liquidity provision and management. How exactly to calculate and allocate these costs to specific products and client segments, not to mention sell the need to do so internally, will be tricky.
- External pricing. Having “discovered” the cost of intraday liquidity, banks might want to factor that in to the cost of their service offering. But then they will have to explain to end clients that they are passing on a cost that had not been discussed in the past. That too is not the easiest sell.
- New pricing and service levels for correspondent clients. But the thorniest issues are likely to arise within the correspondent banking chain. Currently nostro agents/cash providers have full control over the timing of payment execution. The only commitment is Value Date. Should banks decide to charge for intraday overdrafts based on actual exposures, clients may very well demand more control over their flow – for example tools to allow customized transaction management, differentiate between urgent and less urgent payments, limit exposure, and so on. This in turn means providers lose the ability to fully manage their own positions. Would the potential new revenues justify this loss of control over their own flow? Banks will have to decide. In some jurisdictions, for example the EU, where the ECB expects its banks to include intraday liquidity costs as part of their liquidity and fund transfer pricing, they will be forced to act.
While the jury is still out on these and related questions, it is clear the intraday liquidity topic is far from dormant.
With clouds on the horizon, banks will want to be prepared for the challenges and opportunities of any upcoming storm.