Cash management - think of the carrot, not the stick

Cash management - think of the carrot, not the stick

As the FSA’s deadlines for liquidity compliance draw closer, the topic is constantly in the press and is receiving plenty of lip service. The FSA estimated that the combined cost to the industry will be £150-200m, which will likely echo the Olympics 2012 budget and fall far short of the true cost.

While most are up in arms about the upheaval the regulation will bring – huge data management issues, system silo issues, more stringent scenario and stress testing requirements – this is a much needed driver for change, however overdue. Banks will need to pay very close attention to their intra-day nostro account flows in near/real-time and manage balances more effectively to ensure optimisation and management of liquidity buffers.

Most tier 1 and 2 banks have hundreds of thousands or even millions of transactions from multiple and often disparate sources, flowing through their nostro accounts daily. They are faced with the additional burden of aggregation and disaggregation of flows originating from multiple legal entities and intra-group activity. Outdated legacy systems are simply not up to the challenge of managing the volume, complexity, or rate of in-flow and out-flow transaction data, which fluctuates hundreds of times a second at peak times. Some banks are still using spreadsheets!

If a bank cannot manage its liquidity, and persistently breaks its buffers, it will suffer through hefty penalties, the threat of an FSA representative joining the board and ultimately, nationalisation.

Here’s the carrot – there is an opportunity here for banks to make their cash work harder through better nostro account management.

A nostro account with a cash surplus at the end of the day is dead money – it’s not profiting the bank and equally debit balances are painfully expensive to support.

With accurate intraday views of spot cash positions and forward projections, coupled with a greater level of automation and the ability to apply meaningful stress and scenario tests, banks can ensure their optimum balance management. Target balance maintenance, funds sweeping, market trade recommendations and execution are all functions where heightened automation can really be improved.

Liquidity is becoming a scarce resource within banks. The availability of cash and access to this and short-term liquidity will continue to be a significant issue. Banks therefore need to take a proactive approach to their cash management – if they can’t manage their own accounts, why should they be trusted to manage others’?