One of the big flaws exposed by the financial crisis was the lack of attention paid by banks and regulators to liquidity.
With national watchdogs clamping down and new requirements included in the Basel III rules, this vital measure of financial strength is back at the forefront of banks’ risk management.
However, banks are seeking to improve liquidity management in persistently volatile markets.
Sovereign bonds previously seen as safe assets for liquidity purposes have been downgraded and doubts hang over future ratings. Currency and interest rate movements also affect banks’ liquidity positions.
In addition, banks face a war for retail deposits, which are once again seen as the bedrock of a bank’s liquidity position.
Risks and opportunities
Many banks’ systems struggle to cope with the ongoing changes forced by the regulators and the market. This situation risks them failing regulatory requirements and missing opportunities for greater efficiency in managing liquidity.
Banks typically collect cash flows from dozens of source systems and then send them in compressed form to their liquidity risk system, which calculates them in a night batch running the requested key performance indicators.
The downside of this is that simulation and analytical capabilities are limited to the compressed level of detail and they can’t react to intra-day market changes.
Based on HANA it is now possible to turn the nature of this overnight processing into on the fly calculations, simulations and drill down to the lowest granular level of a cash flow. With this banks can respond immediately to events.
If a country’s sovereign rating is downgraded, a bank holding the bonds will be able to react immediately to sell or buy assets. By mining intra-day data in this way they can better protect their liquidity position and run a lower, more effective liquidity buffer.
In a recent performance assessment, HANA reviewed 200 million cash flows per second. Not so long ago, a million per second was regarded as a great result. Customers tell us this change has revolutionized the way they manage their liquidity.
HANA also allows banks to respond to changes in the retail market to hold on to valuable deposits by identifying risks that customers will leave for another bank. One customer told us that HANA brought the calculation time for analysing 60 million customer records down to five seconds from 45 minutes.
The potential of in-memory data is only just being realised and it has come at the right time for banks under pressure to maximise their regulatory compliance, financial security and efficiency.