The future of liquidity management is volatile. Liquidity management is facing the challenges of regional conflict and the impact of sanctions, inflation, and supply chain delays. This economic climate’s instability has increased the pressure for financial institutions to ensure they have assets in the right place at the right time.
This is an excerpt from Future of Payments 2023.
Globally, banks and fintech firms are feeling the strain of current liquidity management pressures. Adding to this pressure is the increasing amounts of real-time processes. While these processes are the direction the global banking system is heading towards,
it places large strains on liquidity supplies.
Within this current climate, it is not surprising that only 41% of C-suite executives are highly confident in their liquidity management. It is imperative that banks and their clients are able to adapt to the current reality. They must be able to cope with
and overcome the challenges they face within liquidity management. To not do so could result in dire consequences for each institution.
Challenges facing liquidity management
Silicon Valley Bank has placed liquidity management under a greater spotlight. The bank faced a liquidity crisis which resulted in its collapse. In light of this, many financial institutions have faced a reassessment of their liquidity management systems.
Alexandre Maymat, head of GTPS at Société Générale comments that these recent events have shown that “in an ever interconnected and 24/7 operational world, massive liquidity bank runs can happen within a few hours. This is a major challenge for our treasurers
which are seeing their role become more complicated as instant payments volumes grow.”
With this environment under a microscope, there are further pressure from increasing interest rates. Inflation fell by 10% in April 2023, according to the UK Government, and while the lowering inflation may help with interest rates, this has continued to
place a tension around liquidity management.
Olu Adebiyi, global head of liquidity and account services, BNY Mellon, explains the importance of maintaining “effective liquidity management has always been crucial in any environment, essentially ensuring that your cash is in the right place, at the right
time, and in the right currency. These factors, coupled with a volatile macroeconomic environment, create challenges for treasurers looking to optimise operating cash, maximise yield and manage risks effectively and efficiently.”
As the market continues to be unpredictable, it is imperative that financial institutions have control of liquidity management and are prepared for adverse events.
Future-proofing liquidity management
Using predictive models is one of the main ways treasury and cash management departments can better prepare themselves for changes in the economy. Companies are already availing of this technology, but there is a need to have more extensive models with increased
access to data.
Maymat continues on this point, arguing that “it will be of utmost important for them to have ever better predictive models for liquidity usage and consumption, allowing them for example to anticipate peaks of activity when monthly or yearly taxes are due.”
Adebiyi also shares this perspective and offers five key strategies of where liquidity management can be improved, and two of these are related directly to the technology used.
The first is to “digitalise and automate. Digitalisation can play a significant role in enhancing liquidity management by providing real-time access to financial information, streamlining processes, and improving efficiencies. It can, for example, be used
to automate various liquidity management tasks, such as cash flow forecasting, invoice processing, and payment reconciliation, which, in turn, reduces the need for manual intervention, and can save time and resources.”
Streamlining of processes can be imperative in spotting any red flags in liquidity management which is missed when bogged down in other issues. Considering this, Adebiyi also recommends leveraging technology. “Having access to the latest technologies will
be key in cash management solutions of the future. That is why banks are increasing investments in blockchain rails and APIs to help improve the ways in which treasurers can seamlessly manage their liquidity.”
Utilising technology and predictive models can help institutions to anticipate any adverse event, however, Maymat, offers the suggestion of liquidity bridges for how to deal with events as they occur and avoid a crisis.
“A central bank liquidity bridge is a short-term intraday liquidity arrangement set up between two or more central banks. With a liquidity bridge, collateral held by a payment service provider at one central bank can be used in another jurisdiction to get
intraday liquidity from another central bank. Liquidity bridges may thus help reduce credit and settlement risks arising from foreign exchange transactions while making liquidity flow more fluently at a cross-border level.”
The possibility of liquidity bridges is something that the G20 has advocated for in their roadmap to enhance cross-border payments. Additionally, the Bank for International Settlements also advocated for this in their paper: “Liquidity bridges may also support
financial stability by reducing asset and currency volatility and stabilising the demand for collateral and reserves. They could make LVPS participants’ cross-currency liquidity management more robust to market disruption, e.g., limited access to FX swap markets.”
Adebiyi also notes how relationships with banking partners can help ensure the security of treasurers’ cash and investments. “Treasurers should consider whether the bank’s credit rating, scale, on- and off-balance sheet capabilities and functionality meet
their cash and investment objectives. They should also evaluate the bank’s suite of liquidity management solutions, such as sweeping and pooling capabilities, to have greater access to data for cash forecasting and investment decisions.”
Adebiyi recommends centralising cash positions in a single location or a main header account to allow for better visibility of global cash positions. Additionally, investigating investment policies to ensure diversification and ask banking partners what
type of end-to-end investment options they offer for both operating and strategic cash could be beneficial.