How real-time liquidity management can mitigate risk
By Neville Roberts, Planixs CEO
Financial institutions leverage data and analytics to manage credit, market and operational risk. Neville Roberts, CEO, Planixs explains the importance of understanding real-time liquidity management to help mitigate such risks and identify opportunities in the banking sector.
The 2023 US banking crisis
It has been a turbulent year for banks in the United States. Rising interest rates, economic pressure and outdated banking practices fuelled failures at several American banks, including Silicon Valley Bank, Signature Bank and First Republic Bank. Thankfully for their customers, deposits were either assumed by the Federal Deposit Insurance Corporation (FDIC) or taken over by larger banks. Regardless, the crisis shook the country, where smaller banks are considered the backbone of America. With strong ties to their local communities, small local banks have the ‘on-the-ground’ expertise that international institutions cannot offer. According to Goldman Sachs, small banks are responsible for 70% of all small business lending in the US and small businesses comprise nearly half of the nation’s workforce.
There wasn’t one single reason for these failures, nor were they limited to one geographic area: the events caused a knock-on effect in Europe, with financial institutions now keener than ever to identify risk and avoid following a similar fate to the Credit Suisse banking collapse, when it was purchased by Swiss rival UBS in March 2023 for $3.3 billion, in a deal approved by Swiss regulators.
Fears mounted that financial contagion was underway – the knock-on effect of an economic crisis from one economy, region, or country to another. Although the actual impact was less than feared, many financial institutions realised that easily accessible real-time data insights could enable banks, buy-side firms and intermediaries to better identify where systemic issues may lay and take preventative action before issues become critical.
Why is real-time liquidity insight vital?
As seen in 2023, liquidity crises can unfold at an alarming rate. A typical liquidity crisis, such as a bank run, occurs when an institution cannot meet withdrawals as quickly as they are requested. In such scenarios, the ability to monitor and manage liquidity in real time can mean the difference between a controlled response and a catastrophic failure. Moreover, real-time liquidity management offers strategic advantages beyond insight and regulatory compliance. It enables financial institutions to make more informed decisions, respond swiftly to market opportunities and effectively manage risk. This agility is vital for navigating the complexities of the current uncertain economic landscape.
Real-time liquidity management is a fundamental element of the modern financial institution’s toolkit, where traditional monthly reporting cycles are no longer fit for purpose. As institutions adapt to T+1 becoming the new standard for settlement, the transfer of monies becomes faster, making real-time metrics a strategic imperative, not just a safeguard. Institutions must adapt by accessing and analysing liquidity data in real time, to ensure the correct metrics are being presented promptly and that the board not only understands what the data indicates but isable to question and challenge them. Financial institutions must be able to collect, process and interpret vast amounts of often siloed financial data instantaneously. This transformation goes beyond technological upgrades; it necessitates a cultural shift within organisations, prioritising data-driven decision-making, and continuous monitoring.
At its simplest, this intelligence helps to mitigate liquidity risk and enables other departments to understand the benefits of knowing their real-time liquidity position. At its most advanced, real-time data insights can underpin new business capabilities, inform data-decision making and help identify new revenue streams.
How to harness advantage from historical data
Liberating value from historically disparate and undervalued data sources is also key. In the financial services sector, such data was typically only available to tech teams, who may not have appreciated its depth of value to the business. Or, it may have resided in silos within the organisation, where its existence was disregarded, or its cumulative power left unharnessed. Turning unknowns into knowns, by extracting value from historically siloed and difficult-to-access data sources, in real time and on-demand, and without having to depend on technical teams and resources, sounds too good to be true? However, with innovations such as Insights from Planixs, stakeholders, from the board to department heads, can unlock this data via an easy-to-use platform, to interrogate and derive real-time data advantage.
How is liquidity management evolving?
Banking technology is changing faster than ever before. The evolution of technology that plugs into existing infrastructure (APIs), the development of the underlying networks themselves, and the integration of blockchain and tokenisation of assets, is going to improve a customer’s ability to easily move huge sums of money in and out of financial institutions. Based on the changeable nature of the current environment, liquidity management is underrepresented in the measures of health metrics and success, especially when we consider what is discussed at board level.
There are major limitations to traditional cash and liquidity management systems and serious benefits to real-time solutions versus the traditional approach. Tools based on machine learning, accessing, compiling, and exploiting the vast stores of data housed in financial institutions, going back decades, can be analysed to make incredibly accurate forecasts of real-time liquidity usage. This can highlight potential issues or problems before they arise. An early-warning system for the board for when things don’t go as expected. Rising interest rates mean that unallocated liquidity is going to cost banks money if not utilised. Real-time liquidity management is a gateway to opportunities that can transform back and front-office operations and open up untapped opportunities for growth.
“Real-time data insights power decision making and can also act as an early warning system for financial institutions, highlighting credit risk and even market sentiment.”
How to integrate real-time liquidity into your business
Real-time liquidity platforms are live and operational right now in banks of all sizes around the world. A bank can be live quickly, typically in 3-6 months for critical functionality with several immediate benefits. And without the need for significant data to be sourced from the bank’s internal systems. The right liquidity intelligence solution will deliver real-time, enterprise-wide 360° visibility providing dynamic real-time insights across assets including cash, securities, and CBDCs.
Cross-functional access to liquidity data fosters a culture of shared responsibility for liquidity risk. In the same way that general risk management is now a cornerstone of decision-making for every function, we should also ensure that liquidity management is treated as a core competency. The future of real-time liquidity management is already here, but lags behind where it should be. Financial institutions are held back by a lack of internal specialist knowledge and by cultural misunderstandings of liquidity as purely a Treasury issue.
The technology required to facilitate true real-time data collection and insight generation is available to all. Real-time liquidity management is one of the key ways in which financial institutions can build and maintain strategic advantage in a global economy that now operates on near-instant timeframes, and avoid the near-catastrophic banking collapses seen in the US and Switzerland in 2023.