Bank treasuries ill-protected against liquidity risks

A new Swift report highlights a disconnect between bank’s internal treasury capabilities and the products they sell to customers.
Wim Raymaekers
Wim Raymaekers

Despite all their rhetoric to the contrary, banks still have a siloed approach to liquidity risk management -- a fact that has the potential to impact corporate treasury credit lines and other counterparties across the spectrum.

"Surprisingly, there is a disconnect between the people who [are] organising the payments and cash reconciliation and the business units -- the treasuries -- that ultimately need that information within banks," said Wim Raymaekers, head of banking market at the Society for Worldwide Interbank Financial Telecommunications (Swift) in Belgium.

Liquidity management tools are big business for the transaction banking arms of most large global institutions. BNY Mellon recently appointed Filippo Santilli Asia-Pacific managing director of liquidity services in response to client demand for more robust management tools, and last month Citi's Asia-Pacific treasury and trade solutions head Sridhar Kanthadai outlined the importance of such products to Asian customers in an interview. The disconnect between the services offered to clients and what institutions employ internally creates risk for the bank and all of its counterparties.

Raymaekers is the author of a recent Swift report looking at liquidity risk and what banks are doing to counter it. In research prompted by the late-2008 credit crunch, he found that financial institutions face four kinds of threats to their liquidity: short-term transactional, market, tradability and longer-term funding. Short-term, especially intra-day, risk was highlighted in the report because many banks were found to be incapable of evaluating this for their own liquidity.

"You need to have information on nearly each and every transaction that is going to influence your liquidity," said Raymaekers. "Because if you have a $30 million payment that needs to be made tomorrow and you don't know about it, you're going to be hit with an overdraft or with the inability to make good on the $30 million. That is what banks are increasingly trying to do, calculate their liquidity from the bottom up."

He said banks currently only have a view of approximately 65% to 70% of all of their liquidity at any one time.

The report does not suggest actual fixes to address the gaps in financial institutions' liquidity monitoring tools, though it could be inferred that any number of vendor solutions -- or even the banks' own cash management solutions -- could be used to improve the visibility and forecasting for their internal financial teams.

One area institutions need to especially watch is financial regulation. Basel II requirements have already begun to push up the level of capital that banks keep on hand, sparking complaints from many firms about the negative impact on the amount of trade finance and other treasury-related credit they are able to offer. Raymaekers said that the proposed regulatory changes in the UK, US and Europe will require institutions to increase tier-1 capital on their books and adhere to new levels of liquidity reporting -- moves that will take up both time and money.

"These regulations carry a price tag," he said. "Not just systems but also procedures and you need to hire people."

Last month, Selwyn Blair-Ford, a senior domain expert for risk and regulatory compliance vendor FRSGlobal, warned corporate treasurers that if they do not speak up, the proposed regulatory changes would impact the availability of funding thus limiting the scope of activities their businesses can engage in.

In the report, Swift concludes that banks need to move now and move fast in order to have robust liquidity risk management procedures and systems in place before the next credit upset and to be prepared when -- not if -- new financial regulations are formalised.

¬ Haymarket Media Limited. All rights reserved.
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