Real-time liquidity monitoring and management: do banks have a choice? (Correspondent Banking view)
by Emmanuel de Bouard, Head of Cash Clearing Services for SG GTB
“By requiring intraday liquidity monitoring, financial regulators are asking banks to pay attention to something that is important. We are changing our behaviour and becoming cleverer about how we manage liquidity and close any gaps.”
Financial considerations and regulatory drivers are putting increased pressure on banks to move from daily liquidity reporting to effective real-time liquidity management and monitoring. To what extent will this impact the existing correspondent banking practices and model? How are banks coping today with the required data collection challenges? Should the industry explore collaborative avenues to reduce the artificial use of liquidity and its related risks?
- Banks do not have a choice when it comes to real-time liquidity monitoring and management. Increasingly, banks have to monitor liquidity because they have to report their liquidity positions to financial regulators. In monitoring their liquidity positions, they are able to show that in some cases they have a need for liquidity. Financial regulators will require banks to cover these gaps in liquidity – with collateral or buffers – in order to reduce risk. Because this is costly, banks are monitoring liquidity on a real-time basis in order to ensure their liquidity requirements are kept at a minimum. For example, rather than making all payments at a certain time of day, banks can monitor payments so that those that can be deferred are paid later in the day and liquidity requirements are reduced.
- In monitoring liquidity, banks are aware of the need to avoid shortfalls and the associated high costs of borrowing liquidity. This approach to monitoring implies that the bank has the capacity to analyse liquidity and to ask its customers to cover their accounts so that liquidity is available at any moment it is required. If this isn’t the case, the bank can extend credit lines on an intraday basis to customers. The question here is, does the bank charge for such facilities?
- In real-time payments, there is much less need for liquidity monitoring. The vast majority of real-time payments are person-to-person, domestic transactions. These are generally low-value and the liquidity to manage such payments is almost non-existent because in a real-time system the transaction is immediately settled at the central bank or is pre-funded. In a real-time payments system, liquidity is brought into the transaction when the payment is made. Because there is no liquidity shortfall there is no need to report on it, which relieves banks of a significant burden, although they will always have to ensure that they are safe and there is no liquidity gap.
- My belief is that not all payments will be transacted in real time. Customers will be given a choice to pay extra to ensure beneficiaries receive their funds immediately, or they can continue with value dates of the end of the day, for example. It is likely that urgent correspondent banking payments will be done on a real-time basis, but others will not.
- At present, liquidity is plentiful and there are no issues around shortfalls. But if all payments were to move to a gross settlement, real-time basis then in periods of liquidity crisis this could be a problem if someone in the chain cannot make a payment. The payments industry might be happy to have a net settlement system as a back-up if there are liquidity problems in the future.
- When implementing real-time payments systems, the industry has to address the consequences around liquidity, security and controls around regulatory requirements such as Know Your Customer and anti-money laundering. How are these elements handled within the very short time periods between a payment initiation and the funds being credited to the beneficiary? The time period can be as short as 15 seconds and the implication is that both the sending and receiving institutions can undertake all of the necessary controls within that period. If these elements are not addressed, there could be many rejections of transactions in real-time systems.
- Because most real-time payments systems are domestic, there is a level of comfort between the banks involved as they are known to each other. On a correspondent banking basis, there are many more questions and less comfort in dealing with banks that may not be as well known. Financial institutions have to be comfortable that they can make all the necessary moves around liquidity, security and controls within the real-time framework.
- SWIFT’s Global Payments Innovation Initiative (GPII) goes some way to addressing the challenges of real-time payments in correspondent banking. Under the system, payments will be announced immediately to the beneficiary, which can then reuse the funds even if the actual transfer is made at the end of the day. The transfer of information regarding the transaction will be enough. In a real-time system, the funds have to be transferred immediately, which requires real-time accounting systems on the part of banks. Very few banks in Europe have such systems and to acquire them represents a significant investment.
- Data collection is not a major issue in P2P real-time payments as most of these transactions are on-offs and there is no need to collate information as it is of no further use to the institution.
- To manage the use of artificial liquidity, banks require a great deal of information to monitor what is going on throughout and average day and also during exceptional days. SWIFT can help here by providing information on all of a bank’s payments transactions, for example by extracting MT942 messages for intraday reporting. that are going through the day. Another option is for banks to collaborate and provide a pool of liquidity to help close funding gaps. Banks now have built up considerable experience with CLS and could put this to use to address the risks of using artificial liquidity.