|Ludy Limburg, senior product manager, RBS|
There is a clear need for banks and businesses to provide enough liquidity at the right time and place, under both normal and stressed conditions. Risks previously considered theoretical when liquidity was always available suddenly became very real after the financial crisis.
Recent regulation like Basel III first focused on strengthening the existing capital requirements and introducing new rules around short and long-term liquidity and funding.
The Bank for International Settlements (BIS) then issued a report on intraday liquidity management last month outlining the reporting requirements local supervisors need to introduce before January 2015.
These requirements broadly reflect the approach several regulators have already taken in the last few years.
The BIS report includes rules on the use of intraday liquidity on nostro accounts accounts held with other financial institutions.
In the past, large intraday lines were granted to make sure payments could be executed during the day. Large intraday overdrafts were therefore not considered a liquidity risk by the nostro account holder.
This approach is no longer enough. If a large overdraft is not adequately funded by the expected level of incoming payments, the account holder will have to look for other ways to fund the position. This might be particularly difficult in a stressed market hence the regulators call for sufficient liquidity buffers.
Banks must understand their intraday liquidity risk on all their accounts and be able to report against all appropriate liquidity indicators. They will need to demonstrate complete control of their own flows and those of their clients.
As a result, banks need to overhaul their processes because the financial industry has worked around end-of-day reporting for decades. The information required on nostro accounts is currently unavailable as it is not included in todays reporting regime. Banks will have to look into solutions and offer services to their clients to bridge the gap.
Long term, it should be worth it. Banks will be able to use the detailed data they must gather to gain greater insight into their intraday liquidity flows. Analysing this data will enable them to mitigate risks and improve liquidity efficiency, which in turn will lead to lower buffer requirements and better services.
To meet the new requirements as efficiently as possible, banks will have to consider intraday liquidity when making choices in their network set-up.
For example, further concentration of cash flows over a smaller number of nostro accounts will most likely improve intraday liquidity efficiency.
A service providers ability to deliver detailed reporting on intraday liquidity will also be central to a banks decision on who to work with. Building a complete picture of liquidity use throughout the day is extremely challenging because different service providers will collate the information in different ways using varying standards.
The focus on intraday liquidity could have a negative effect on payment behaviour. Some businesses might actually start charging for intraday liquidity use. This could have a very bad impact on the overall industry.
Charging could lead to participants delaying their payments to create a positive effect on their liquidity position in the short term.
Needless to say, if all market players did this, the liquidity problem would return only with higher spikes. Risks would increase as payments backed up, there would be less time to solve problems and the likelihood of a stress event would increase.
We need to ensure as an industry that we create a market where we increase liquidity efficiency and lower intraday liquidity risks.
It is now more important than ever that businesses stay on top of their liquidity positions at all times throughout the day. Achieving that presents a number of challenges, but those that get it right wont just be meeting regulators rules. They will benefit from less risk, lower buffer requirements and decreased costs.For more RBS Insight content, click here
No representation, warranty, or assurance of any kind, express or implied, is made as to the accuracy or completeness of the information contained in this document and no member of the RBS Group accepts any obligation to any recipient to update or correct any information contained herein. The information in this document is published for information purposes only and does not constitute an analysis of all potentially material issues. Views expressed herein are not intended to be and should not be viewed as advice or as a recommendation. You should take independent advice in respect of issues that are of concern to you.
This document does not constitute an offer to buy or sell, nor a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that is capable of acceptance to form a contract. The products and services described in this document may be provided by any member of the RBS Group, subject to signing appropriate contractual documentation. No member of the RBS Group shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this communication.
The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of Scotland plc is Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Royal Bank of Scotland N.V is authorised by De Nederlansche Bank (DN B) and is regulated by the Autoriteit Financiele Markten (AFM) for the conduct of business in the Netherlands. The Royal Bank of Scotland plc is in certain jurisdictions an authorised agent of The Royal Bank of Scotland N.V. and The Royal Bank of Scotland N.V. is in certain jurisdictions an authorised agent of The Royal Bank of Scotland plc.
RBS is authorised and regulated in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York Department of Financial Services, the State of Connecticut Department of Banking, the Federal Reserve Bank of Boston and the Board of Governors of the Federal Reserve System. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC member and subsidiary of The Royal Bank of Scotland Group plc.
Copyright 2013 RBS. All rights reserved. This communication is for the use of intended recipients only and the contents may not be reproduced, redistributed, or copied in whole or in part for any purpose without RBS prior express consent.