Financial Resiliency: Why Intraday Liquidity Management Needs a Rethink

The impact of recent market and geopolitical events has tested the financial resilience of financial institutions worldwide, leaving firms questioning how they can future-proof their risk and intraday liquidity management practices to better weather future storms. 

In this blog, I’ll be looking at how recent advances in technology now enable treasury managers to more effectively identify, understand and control real-time exposures across all business silos. 

Events as recent as the frantic global equities sell-off are likely to only intensify regulatory focus on financial resiliency. This was already heightened by the 2023 collapse of various systemically important banks, as well as the conflicts in Ukraine and Gaza. Ultimately, we’re living in volatile times and with upcoming elections, chances are we’ll see further bouts of volatility before the year is out. The sudden impact of events like these can stress firms and exaggerate the market since, as I’m sure you’re aware, volatility spreads faster when banks can’t respond quickly.   

In fact, events don’t even have to be global or newsworthy for a firm to feel the impact of liquidity and capital constraints; localised changes can also stress an organisation. What’s needed is the ability for firms to more robustly manage intraday liquidity and to be able to rapidly react and adjust their strategies in light of changing conditions.

What’s your exposure?

Regulators want banks to be able to identify and understand all of their exposures across business silos. They also want to see settlement finality accomplished as soon as is practical so that banks don’t introduce any undue stress into the market – for example by failing to meet their own payment obligations to a counterparty in stress. 

However, at the same time, no firm wants to be in a position where they’re unduly exposed to settlement risk by continuing to make payments when there’s a heightened risk that their counterparty won’t reciprocate. So, before they pay out, the firm needs to know which payments they’ve actually received from their counterparty that they can safely reciprocate. I was pretty selective with my words here – “knowing which they’ve received”, the reason being that’s quite different to what the firm, assumes it has received at a given point in the day. 

“Firms need to know which payments they’ve actually received—that’s quite different from what the firm assumes it has received at a given point in the day”

Most firms, unfortunately, lack the real-time processing capabilities this requires. This is often due to a continued reliance on multiple outdated legacy technologies and processes which lack real-time capabilities. The data produced is siloed and fragmented and doesn’t allow treasury or risk managers to quickly or easily assess their level of exposure or the impact of events across business lines. 

Furthermore, if treasury teams can’t see their positions and obligations, and understand which payments have been received in real time, they also have limited ability to fully employ the automated and controlled payment optimisation mechanics needed to increase financial resilience. 

Increasing financial resilience: The power of real-time visibility

Increasing financial resiliency requires visibility and control. We recently released a set of intraday liquidity management tools, available as part of our Core-Payments® solution, designed to provide treasury and risk managers with the level of real-time visibility and control required to help financial institutions become more resilient. 

These tools provide a real-time view of current balances, all exposures by counterparty, currency, and legal entity, and outstanding obligations (including the time these become due). This information can be accessed via a dedicated dashboard configured to meet the user’s specific needs. This insight allows treasury and risk managers to identify, at any point in the day, exactly which payments have been received from any given counterparty on both a real-time and historical basis. 

“These tools provide a real-time view of current balances, all exposures by counterparty, currency, and legal entity, and outstanding obligations”

This insight can then be used to drive informed decisions about which payments to release as a matter of BAU settlement risk controls or in times of market stress to protect from more systemic implications.

“Treasury and risk managers can identify, at any point in the day, exactly which payments have been received from any given counterparty on both a real-time and historical basis”

Increasing financial resilience: Better planning for stressed situations

From this same dashboard, treasury teams can also use predictive analytics to accurately forecast expected intraday activities, the timing of inbound payments and their projected impact on intraday liquidity flows. This functionality can prove invaluable as a means of increasing financial resiliency as unexpected events start to emerge, allowing treasury teams to forecast how the stressed conditions are likely to impact intraday balances. Furthermore, the tools will then recommend how specific payments could be released in a different sequence to minimise a liquidity shortfall and best support the continued payment of obligations as the situation evolves.

“As unexpected events start to emerge, treasury teams can forecast how the stressed conditions are likely to impact intraday balances”

Increasing financial resilience: Spotting early warning signs

Real-time visibility into client and currency-level activities allows treasury managers to more effectively monitor intraday balances. Treasury managers can layer in rules to raise alerts when current or forecast end-of-day balances breach pre-set values that can be set on an absolute or relative basis. 

Pairing this insight with historical data, the new tools allow risk and treasury teams to understand how events have previously impacted counterparty behaviour and their own business’ upstream funding demands. Identifying deviations in these patterns can offer a valuable early warning sign and allow firms to take immediate action, activate controls, and adjust outbound payment sequencing to increase resiliency.

Increasing financial resilience: Netting and safer settlement

With enterprise-wide visibility and orchestration tools, treasury teams are better able to extend conventional liquidity management strategies, for example, by automatically netting across different business lines, to compress the overall obligation a firm needs to make to settle counterparty positions. 

Since Baton’s Core-Payments solution conducts real-time reconciliations, and payments can be set to release based on dependencies such as the receipt of the inbound leg, settlement also becomes safer. 

Increasing financial resilience: More effective stress testing

Allowing banks to respond to regulators’ calls for more extensive stress testing, risk managers can now model quantitative analysis in real time using historical time-stamped data and predictive analytics to evaluate the impact of different scenarios on intraday liquidity. This enables firms to better predict the stress likely to be caused, for example, when a counterparty’s behaviour deviates from historical patterns. Using this insight, firms can then assess how adjusting the sequence or priority of outgoing obligations in this scenario could reduce the impact of these events.

“Banks can respond to regulators’ calls for more extensive stress testing”

If you would like to learn more about how our new intraday liquidity capabilities could help your firm increase financial resilience, please click on the button below, and I will reach out. I’d love to share more insights with you.