Increasing Importance in Uncertain Times

Many factors drive the need for more accurate, timely, and proactive liquidity management, including increased regulation and as the continued shift to faster payments.

During a recent PaymentsJournal webinar, Jo Wright, Director of Solution Enablement at Fiserv, and Steve Murphy, Director of Commercial Payments at Javelin Strategy & Research, spoke about the key ways banks can better manage their liquidity in 2023.

Basel IV and Continued Regulation

Banks are required to maintain a certain level of liquidity, which ensures that they can meet the demands of depositors, creditors, and regulators in times of financial stress. Amid moves to introduce further regulation, one key focus has been the development of Basel IV.

Basel IV has been developed by the Basel Committee on Banking Supervision, an international forum of central banks and regulators from around the world. It aims to improve the resilience of the banking sector by reducing the risk of financial crises.

According to Wright, implementation of Basel IV has been moved to Jan. 1, 2023[JE1] , with implementation taking place over a five-year period.

“That’s the timeline at the moment,” Wright said. “As we know, these timelines sometimes have delays. [But Basil IV] is meant to strengthen the international banking system and standardize the rules from country to country.”  

The Move to Faster Payments

In today’s volatile and interconnected financial markets, banks need to be able to manage their liquidity in real time to minimize the risk of losses as well as adapt to a financial system that is increasingly dominated by real-time payments.

“Everything today is moving faster, including payments,” Wright said. “With the changes to the payments rails and movement towards immediate payments, banks aren’t working anymore with the restrictive cutoff times and waiting for next-day confirmation of settlements. They don’t have to wait for their statements, their closing statements, or their balances.

“The faster payments can be made, the faster liquidity and cash-balancing changes need to be visualized and monitored by the banks. This can allow interest debts to be settled and interests to be accumulated. This move to immediate payments requires 24/7 monitoring and the ability to know what is happening right now.”

Faster payments in domestic markets and, more recently, cross-border payments are driving the focus on liquidity. “All of the [real-time] systems that have been implemented so far have been domestic,” Murphy said. “But now we’re starting to see movement cross-border. So cross-border liquidity, which is where a lot of the high-value transfers happen, is also important.”

According to Wright, new initiatives in cross-border payments are being driven by SWIFT gpi and instant, cross-scheme integrations between Europe and the United States. SWIFT gpi (Global Payment Innovation) is a cross-border payment service offered by the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The service uses such advanced technologies as distributed ledger technology and end-to-end tracking to enable faster and more efficient payments.

For banks, the upshot is a need to document liquidity in nostro accounts—those with foreign currency held by a bank in another country—more frequently than they used to. When a bank receives a payment in a foreign currency, it can credit the funds to its nostro account in that currency and use the funds to make payments to its customers or to other banks. In other words, it allows banks to do a cross-border payment without actually converting the currency.

“Traditionally, managing nostro account balances has been done overnight into day,” Wright said. “But with real-time schemes such as the SWIFT gpi, the ability to be able to move money and track money in real-time has made managing your liquidity that much more important.”

How Banks Can Directly Benefit from Liquidity Management

When banks know exactly how much money they have in their accounts in real time, they can better monetize that liquidity. “There’s the possibility, which banks have always done, to reduce idle cash and maximize positions,” Wright said. Essentially, banks can withdraw funds that are not needed for liquidity concerns and pay them out as dividends.

Another positive is the consolidation of transaction data from various systems within a bank and the visibility of all financials in one place. This data can be harnessed to help drive growth and profit for banks. “Real-time data can be used for trending analysis, to see where the peaks are,” Wright said. “There’s a competitive edge for banks to monitor their clients’ liquidity and trends and provide this information [and] solutions to clients.”

Better monitoring of liquidity also allows companies to forecast payments. “By tracking positions and trading information, banks can produce accurate real-time predictions of balances throughout the day,” Wright said. “That opens up a host of opportunities to the bank to then use that data to augment that payment processing. For example, a bank might manage liquidity during the day to optimize interest rates, making payment at the correct time to make the best use of fluctuating interest rates during the day.”

Wright recommends some concrete initial steps for banks looking to move toward real-time liquidity management. “The first step is to consolidate the movement of the funds in one in one place,” she said. “That doesn’t necessarily mean changing a payments engine or changing a liquidity system. It can be by augmenting the existing infrastructure with a funnel that puts all the information in and delivers it out in one coherent picture.

“The idea is to put all the transaction data on a single platform, thus enabling decision-making and actions that not only mitigate risk but optimize liquidity positions.”