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2016 Expert views

Real-time liquidity monitoring and management: do banks have a choice? (Operations view)

by Dennis Sweeney, Global Liquidity & Collateral Relationship Management, Societe Generale - 2016

“Correspondent banking is dead, long live correspondent banking. This part of the industry is in a state of transition and we have to move to a new model. There is universal regulation on liquidity monitoring & reporting, interpreted very differently across countries. There is no standard set of regulations to govern this area. International banks have to deal with each country individually.”

 

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?

  • Whether we are talking about liquidity as it relates to business operations in the wholesale markets or to the provision of funds to customers, its monitoring and management is becoming more important in the banking world. A decade ago, the provision of liquidity was relationship-based; there was an understanding that if a client did not have funds for payment credit limits would be extended and it would all work out in the end. Today, the world is much more buttoned-down and as a result of de-risking banks are reluctant to deal with liquidity in the same way.
  • The correspondent banking world has moved very far away from the pre-2008 days. Banks now have to do compliance work around know your customer and have a good understanding of the people and institutions with which they are dealing. Reciprocity has died; banks no longer open accounts in order to get more business in another area. A much sterner view of relationships is being taken and in wholesale banking it is much more difficult to establish a banking relationship. Those organisations that cannot open bank accounts with traditional correspondent banking providers will seek to do so with alternative providers such as challenger banks. But these banks in turn come to the larger correspondent banks in order to get liquidity; they act as a bridge for the organisations that have been rejected by correspondent banks.
  • The collection of data always has been an issue for banks. Data capture is not the problem for the industry – data quality and enrichment is. One of the main problems the industry faces is that the data is not rich enough. The onerous part of the correspondent banking process – from the time a request has been received through to the payment being made – has historically been the enriching of the data and reporting. Progress has been made in terms of agreeing which SWIFT messages to use and information was delivered the following day. But in today’s world the data is required intraday. This requires that information is enriched every day of the week by organisations that are committed to improving their reporting. This is even more onerous a task for banks that have to deliver information back to their clients who in turn are using it to report on their own intraday liquidity controls. SWIFT have taken the lead with the Project “gpii” initiative and linking the work from the LITF, Liquidity Implementation Task Force fits perfectly into the service.
  • To upgrade data collection and enrichment, banks need to look to other industries such as telecoms and aircraft manufacture. Telecos enable users to buy goods via their hand held devices and within minutes the user has received a large amount of data with their receipt. If something goes wrong, the purchaser has all of the information he or she needs to seek redress. We don’t have that in the banking industry. It is the same in the aircraft industry – everything that is done, right down to ordering some screws for the fuselage, is documented, reported and audited. It would be possible to do this in correspondent banking but identity and standards are two big issues that need to be addressed.
  • The provision of intraday credit between banks has been of concern to regulators since 2008 and they are seeking to address the issue in Basel III. By requiring banks to report intraday, they are attempting to track how much banks are lending on an intraday basis without keeping records. Artificial liquidity, whereby a bank will make an undocumented loan to another during the day, is really the granting of credit. It is based on the past when banks provided services that were based on a daily limit and were designed to “help each other out”. Artificial liquidity, or loans without commitment, were in the system along with intraday set credit limits. In the US, banks have to report to the Fed on their intraday lending several times a day and are charged for it. This liquidity of course becomes a problem during the collapse of a bank, as happened with Lehman Brothers. There is never a good time to stop a bank’s activities – many banks now run global operations on a 24x7 basis. Debt is moveable and is linked inextricably to the parent company.
  • The industry could collaborate and universally agree to stop intraday credit lending but it would be a dramatic move. It could be decided that organisations should not operate unless they have cash in bank accounts or provide collateral to secure overdrafts. We are eight years on from the financial crisis and we are still reeling – I am surprised such moves have not yet been made. Banks are operating in a restricted environment but are still offering intraday credit, albeit to fewer organisations.
  • Structural reform, such as the ring-fencing proposals in the UK will put additional strain on liquidity as bank groups are broken up into smaller entities. These smaller banks will have a different central point of liquidity from which to draw and there will be challenges.