Impact of Active Liquidity Risk Management
How Banks Can Take the Risk Out of Liquidity Management
Saving for a rainy day is top-of-mind at banking institutions around the world now that Basel III requires them to maintain enough liquid assets to operate during periods of significant stress. In effect, Basel III increases the amount of capital required to support banking transactions – adding to the cost of doing business.
Other realities contribute to the price of liquidity. Without near- or real-time insight into their short-term liquidity exposure, banks tend to overcollaterize their loans, securities, and other financial assets. This creates a bloated liquidity buffer that requires them to pay hefty premiums to their respective central bank.
The high cost of liquidity can have a negative impact on profitability. How can you strike a balance between maintaining the right level of liquidity and giving shareholders an adequate return on capital?
Focus on Action, Not Reaction
Taking a more active approach to liquidity risk management can put that goal within reach. With such an approach, you can perform dynamic scenario analysis and stress testing to determine the appropriate level of liquidity. You can understand how a prospective transaction is going to impact your liquidity position before it takes place, so you can price it appropriately. With a solid understanding of your liquidity levels and expected cash flow patterns, you can enter deals based on prices and terms that optimize both liquidity and profitability.
Active liquidity management requires a transformational shift for most banking institutions. All too often, managing liquidity is a reactive process in which a dedicated team reports on liquid assets and expected cash flows, raising alarms only when a certain threshold is reached. What’s more, banks typically store silos of data in separate legacy systems, making it difficult to integrate and aggregate the data at a granular level to support regulatory ratios. These multiple systems also lead to complex data migration paths that slow analysis. Meanwhile the need to continually reuse and replicate transactional data across various lines of business creates enormous redundancy that adds unnecessary cost.
Balance Compliance and Profitability in Real Time
New innovations enable banks to manage liquidity more actively and intelligently – optimizing where it is held and how it is used. With today’s real-time technology, you can respond rapidly to volatile market conditions and events that could impact your liquidity position by taking a proactive approach to scenario analysis and stress testing. Advanced in-memory computing eliminates the need to move and transform data; you can generate liquidity calculations using data taken directly from source systems and produce analytical results in real time. And by choosing an open, scalable architecture that can span multiple lines of business across geographies, you can view your entire bank as a single entity from a liquidity perspective.
If you’d like to learn more about active liquidity management and how it can lead to stronger oversight, smarter deals, and greater responsiveness to regulatory requests, click here.