Improving Intraday Liquidity Management: Risks, Costs and Revenue Impact

Improving intraday liquidity management is becoming critical for financial institutions worldwide. With the march toward faster settlement cycles and growing regulatory pressures, treasuries and operations teams are confronted with what can only be described as a multi-million-dollar challenge.

The stakes are enormous. For a mid-sized bank, the annual cost of maintaining intraday liquidity buffers is estimated to exceed $100 million. Despite this, many institutions still rely on data produced by outdated, batch-based systems to manage their intraday liquidity needs. This practice leaves them vulnerable to rising costs, creates risks and inefficiencies, and results in untapped opportunities. 

This article summarises key insights from our latest white paper on Intraday Liquidity and Risk. We’ll explore the challenges financial institutions face in managing intraday liquidity and the practical constraints they face in addressing them. It also examines the internal business drivers that should be considered as institutions adopt a more proactive approach to managing the risks, costs, and revenue opportunities associated with intraday liquidity.

Why Active Intraday Liquidity Management is No Longer Optional

Financial institutions face unprecedented compulsion to tackle and improve intraday liquidity management head-on. Some of the key factors driving this shift include: 

• Faster Settlements: As multiple markets globally transition to T+1 and further compression is likely, institutions need real-time insight into cash flows to ensure transactions settle within the required time frames. 
• Regulatory Pressures: Whilst the Basel Committee on Banking Supervision’s (BCBS) 248 requirements for intraday liquidity management remain, recent events have driven a renewed regulatory emphasis on managing intraday liquidity risks. The European Central Bank’s November 2024 identification of “Sound Practices for Intraday Liquidity Risk Management” is an excellent recent example.
• Technological Evolution: The growing adoption of tokenised assets, distributed ledger technologies (DLT), and faster payment systems adds complexity to managing intraday liquidity requirements. Firms must future-proof their operations to remain viable and resilient in this fast-evolving landscape. 

Breaking It Down: Risk, Costs and Revenue Opportunities 

Improving Intraday Liquidity Management: Risk Assessment and Mitigation 

Measuring and managing intraday liquidity risk requires real-time visibility across liquidity balances, accurate cash flow forecasting capabilities and the ability to mobilise available funding sources to avoid a potential shortfall. In times of market stress, practical risk assessment and mitigation require treasury and risk teams to answer critical questions such as:

• Which payments have been settled, and what are our outstanding obligations?
• Can we meet our time-specific obligations without relying on costly short-term funding solutions? 
• Do historical patterns in payment flows highlight potential risks based on the current situation or forecasted demands on intraday liquidity?

However, many firms continue to rely on outdated, siloed systems and processes that produce fragmented data that they struggle to quickly aggregate and analyse. As a result, their ability to answer critical questions such as these within the required timeframes is significantly hindered.

Improving Intraday Liquidity Management: The Costs

Liquidity buffers represent a substantial indirect cost to financial institutions. Liquidity buffers function like “insurance premiums,” providing protection against liquidity risks but adding to the overall cost burden.

When considering the overall costs associated with managing intraday liquidity, the financial implications can be broadly classified into two categories:

• Direct Costs: These relate to the cost of funding obligations through central bank borrowing, intraday repos, or credit lines from nostro banks.
• Indirect Costs: Banks must hold high-quality liquid assets (HQLA) as buffers to weather intraday liquidity shortfalls. These buffers are currency-specific and determined by both quantitative and qualitative factors. Furthermore, they tend to be extremely costly, with even a 1% improvement unlocking potential savings of $1 million annually for a large bank.

Reducing the size of these buffers is achievable, but it requires financial institutions to reduce their credit needs and strengthen their liquidity management capabilities. Doing so, will necessitate a shift towards more proactive intraday liquidity management for many firms. Key practices supporting this transition include increased netting, which minimises cash movements and can reduce a bank’s overall reliance on intraday credit. Additionally, improving payment outflow controls plays a crucial role. This can be accomplished by using intelligent, automated workflows governed by configurable rules to manage the release of payments based on factors such as their priority, current and projected balances, and counterparty exposure. Collectively, these measures can help firms enhance efficiencies and reduce the strain on available liquidity.

Improving Intraday Liquidity Management: Revenue Opportunities

While discussions around intraday liquidity management often focus on risks and costs, there are valuable revenue opportunities to consider. For example, if an institution can confidently predict that it will hold a “significantly long” position in a given currency during a specific intraday period, it could make the surplus liquidity available in a marketplace. Revenue-generating opportunities could be achieved through, for instance:

1. A market for intraday FX swaps and intraday repo.
2. Intraday money market loans.
3. Differentiated pricing based on the time a payment is received rather than just the date.

By leveraging real-time intraday liquidity management tools, such as those offered by Baton, treasury teams can improve visibility and control. These tools allow for easier identification and mobilisation of available liquidity that could then be actively redeployed to support new revenue streams.  

Addressing Intraday Liquidity Management Challenges Head-On  

Despite its enormous value, improving intraday liquidity management remains a complex transformational challenge for many institutions, often due to the constraints of legacy systems and the evolving regulatory environment. 

1. Legacy System Limitations 

Many banks still depend on outdated and siloed legacy systems to manage risk, payments, and liquidity. While these systems often generate real-time data, the challenge lies in then being able to normalise and integrate this data with all other relevant information quickly enough. As a result, by the time the data is prepared for analysis, it frequently reflects outdated conditions, leading to liquidity insights that no longer align with the current situation. The reality is that today’s fast-paced, liquidity environment requires always-on systems capable of seamlessly processing real-time data from multiple sources.

Solution: Real-time, intraday liquidity management capabilities are now available and provide users with the real-time liquidity insights and controls they need for proactive risk management. Furthermore, implementing these capabilities is possible without requiring a complete overhaul of a firm’s legacy infrastructure. Instead, banks can enhance existing systems with modular platforms designed to integrate seamlessly with current processes. This means banks can address specific liquidity management challenges without the need to immediately implement a full-scale infrastructure replacement programme. 

Additionally, using scalable technologies that provide the interoperability and extensibility needed to bridge the gap between legacy constraints and future-ready capabilities, enable banks to advance incrementally while proactively preparing for tomorrow’s evolving liquidity, payments and settlement ecosystem demands.

2. Regulatory Burden 

Institutions must meet increasingly complex regulatory requirements, from adhering to BCBS 248 “Monitoring Tools for intraday liquidity management” rules to maintaining compliant liquidity levels across jurisdictions. 

Solution: To meet evolving regulatory demands, financial institutions should consider taking a more holistic approach to risk management. This requires moving away from implementing point solutions, and instead building out a more robust liquidity risk management framework able to deliver real-time visibility and automated controls for proactive, enterprise-wide risk management. 

The underlying technology should empower treasury, risk, and operational teams to monitor cash flows, exposures, and obligations in real time across the organisation. It should also integrate granular, historical data insights, enabling teams to identify trends and be alerted to changing conditions so they can promptly escalate emerging issues. It should facilitate accurate forecasting of intraday liquidity shortfalls, offer automated conditional payment release controls, and support comprehensive stress testing. By leveraging such a framework, institutions can stay ahead of regulatory requirements and increase resiliency.

The Path Forward 

Effective intraday liquidity management is no longer optional—it’s a competitive imperative. Financial institutions that implement tools and capabilities designed to prioritise transparency, collaboration, and smart automation stand to significantly improve intraday risk management and unlock considerable cost reductions while generating the potential to explore untapped revenue sources. 

Want to take the next step? 

Our latest white paper has been written to help banks better understand the complex challenge of balancing the risks, costs, and opportunities intraday liquidity management presents. To learn more, please click on the orange button below to download the full white paper and let me know if you would like to arrange a time to speak further?