Robust Intraday Liquidity Management
Tim Neijs* and Martijn Wycisk**
Zanders Treasury and Finance Solutions
August 2015
Zanders Treasury and Finance Solutions is an independent and leading advisory firm specialized in
treasury management, risk management and corporate finance. With offices in The Netherlands,
United Kingdom, Belgium and Switzerland, Zanders aims to build long-term client relationships
with financial institutions, corporate clients and public sector organizations.
[*] Tim Neijs has a Master’s degree in Risk Management from Duisenberg School of Finance (Amsterdam) and
is a consultant at Zanders located in The Netherlands. Zanders Nederland, Brinklaan 134, 1404 GV Bussum,
The Netherlands, Tel. +31 35 692 89 89.
[**] Martijn Wycisk is an executive consultant at Zanders located in Switzerland. He has a Master’s degree in
Economics from Erasmus University (Rotterdam) as well as an Executive MBA degree from Rotterdam School of
Management (RSM). Zanders Switzerland, Gessnerallee 36, 8001 Zurich, Switzerland, Tel. +41 44 577 70 10.
Table of Contents
1
Introduction ...........................................................................................................3
2
Intraday liquidity management (ILM) ........................................................................3
2.1
Intraday liquidity risk principles .............................................................................3
2.2
Why manage intraday liquidity risk? .......................................................................4
2.3
Divergence between regulators on intraday liquidity risk ...........................................4
3
Drivers of intraday liquidity ......................................................................................5
4
Measuring intraday liquidity risk ...............................................................................6
4.1
BCBS intraday liquidity risk monitoring tools ...........................................................6
4.2
Definition of intraday stress scenarios ....................................................................8
4.3
Developing a contingency plan (synopsis) ...............................................................9
5
Implementing an ILM framework ............................................................................ 10
5.1
Robust intraday liquidity management .................................................................. 11
5.2
System and organizational challenges .................................................................. 11
6
Benefits of managing intraday liquidity risk .............................................................. 13
7
Conclusion and next steps ..................................................................................... 14
References................................................................................................................ 15
2
1
Introduction
Management of intraday liquidity risk is an important element of a bank’s overall liquidity risk
management framework. Since the Basel Committee on Banking Supervision (BCBS)
published its “Principles for Sound Liquidity Risk Management and Supervision” in 2008 and
the “International Framework for Liquidity Risk Measurement, Standards and Monitoring” in
2010, banks have made considerable progress in improving their liquidity risk management
framework. Besides the short-term LCR and long-term NSFR risk measures, intraday liquidity
risk management is the next hurdle for banks 1. This paper explains what intraday liquidity is
and discusses the drivers of its risks. Furthermore, this paper describes how BCBS
encourages banks to measure and report intraday liquidity risk under normal and stressed
conditions. The significant challenges banks face in implementing a robust intraday liquidity
risk management framework as well as the benefits associated are outlined. This paper
concludes with some insights into what is next for intraday liquidity risk.
2
Intraday liquidity management (ILM)
Intraday liquidity risk is an issue that applies to all banks. In recent years, banks raised their
capital and liquidity reserves closer to the levels required by regulators. Although just as
essential, intraday liquidity risk management has so far received less attention from banks.
2.1 Intraday liquidity risk principles
BCBS (2008) states in principle 8 that “banks should actively manage their intraday liquidity
positions and risks to meet payment and settlement obligations on a timely basis under both
normal and stressed conditions and contribute to the smooth functioning of payment and
settlement systems.”
The following six operational elements for managing intraday liquidity have been identified:

Measure expected daily gross liquidity in- and outflows, anticipate the intraday timing
of these flows and forecast the range of potential net liquidity shortfalls during the day;

Monitor intraday liquidity positions against expected activities and available resources
(balances, remaining intraday credit capacity, available collateral);

Arrange to acquire sufficient intraday liquidity to meet intraday objectives;

Manage and mobilize collateral as necessary to obtain intraday liquidity;

Manage timing of liquidity outflows in line with intraday objectives;

Be prepared to deal with unexpected disruptions in intraday liquidity flows.
1 LCR stress scenario does not cover expected or unexpected intraday liquidity needs. See BCBS (2013),
“Basel III: The Liquidity Coverage Ratio (LCR) and liquidity risk monitoring tools”, paragraph 41, BIS Jan
2013.
3
BCBS asks internationally active banks to report intraday liquidity risk on group as well as
legal entity level (across all currencies) to local regulators on a monthly basis.
2.2 Why manage intraday liquidity risk?
A bank’s failure to meet intraday payments in a timely manner negatively impacts its own
liquidity position (signalling). The rest of the financial payment system could be negatively
impacted as well due to the high degree of interdependency between payment systems.
Failure to settle payments also causes counterparties to be unexpectedly short of liquidity
(contagion). Disruptions are likely to spill over to other financial institutions and money
markets. Banks should therefore have an intraday liquidity risk management framework in
place. The objective is that banks comply with liquidity regulation on an intraday basis and
are able to make intraday liquidity risk more transparent.
As soon as local regulators adopt the BCBS recommendations, banks will need to comply
with regulation on intraday liquidity risk. Regulation will require banks to actively manage,
measure and report intraday cash flows under normal conditions. Banks must also develop a
contingency plan based on stress scenario calculations and prove their resilience under
stressed conditions.
Enhanced transparency allows for active management of intraday liquidity risk. Complexity of
the intraday liquidity structure differs across banks in terms of the number of relevant
currencies and legal entities. Banks often operate on a system-by-system basis in various
currencies. A bank can be a direct participant in a large-value payment system (LVPS) in one
particular currency, but can simultaneously rely on correspondent banking services in other
currencies. Complexity increases when a bank operates in multiple jurisdictions. These banks
are confronted with different regulatory requirements that pose impediments on transferring
intraday liquidity between legal entities. For cross-border banking groups, transparency on
intraday liquidity for each legal entity is key.
2.3 Divergence between regulators on intraday liquidity risk
BCBS (2013) recommended reporting intraday liquidity risk as of January 1 st 2015. Some
local regulators – including those in the UK and the Netherlands – have already adopted
BCBS’s guidelines and translated the recommendations into detailed reporting requirements.
In these two countries, the local regulator included the capability of managing intraday
liquidity within the bank’s individual liquidity adequacy assessments process (ILAAP).
Starting from October 1st 2015, Dutch banks not only have a 100% LCR requirement, but
they also need to demonstrate how intraday liquidity is managed. Other local regulators,
such as FINMA in Switzerland, confirmed their support for the BCBS guidelines but have not
yet provided detailed reporting requirements on intraday liquidity. These regulators extended
the implementation timeline until 2017. As a consequence, there is a risk that the BCBS
recommendations will not be applied unilaterally across jurisdictions.
4
3
Drivers of intraday liquidity
Intraday liquidity refers to funds that can be accessed during a business day to enable banks
to make (unexpected) payments in real time. Differentiation is needed between the sources
and uses of intraday liquidity. Table 1 provides an insight into the main constituents of the
bank’s sources and uses of intraday liquidity under both normal and (market or idiosyncratic)
stressed conditions.
Aspects
Scope
#
S1
S2
Own
sources
S3
Sources
(S)
S4
S5
3rd party
S6
U1
Uses
(U)
Own
uses
U2
U3
Description
Reserve (cash) balances at central
banks.
Collateral pledged with central banks
that can be freely converted into
intraday liquidity (cash).
Unencumbered assets on bank’s
balance sheet that can be freely
converted into intraday liquidity via
money market.
Secured and unsecured funding
sources available intraday from other
banks (committed or uncommitted
credit lines).
Balances with other banks available for
intraday settlement.
Payments received from LVPS
participants, other payment systems or
through correspondent banking
services.
Payments made to other LVPS
participants, other payment systems or
through correspondent banking
services.
Secured and unsecured funding made
available intraday to other banks
(committed or uncommitted credit
lines).
Contingent payments related to
payment and settlement system’s
failures (when emergency liquidity
provider).
Normal
Scenario
Stress
Scenario
Available
Available
Available
Eligibility /
Asset Quality
Available
Stressed HCs /
CP risk2
Available
Reduced /
Unavailable
Available
Minimized
Available
Delayed
Obliged
Obliged /
Prefund
Available
Reduced /
Withdrawn
Not
Relevant
Contingent
(Obliged)
Table 1: Sources and uses of intraday liquidity
It is important to realize that not all sources and uses are equally relevant to all banks as
intraday liquidity profiles differ between banks. Exposure depends on whether banks access
LVPSs and settlement systems directly or indirectly. Banks also provide or use correspondent
banking services to or from other banks. A bank can also be a direct participant in one
payment system while using correspondent banking services in other payment systems3.
The bank will need to manage its intraday liquidity positions during both normal and stressed
conditions. In case of stressed liquidity, the bank cannot rely on all sources of intraday
2 HC: haircut; CP: counterparty.
3 A direct participant in a large-value payment system (LVPS) is a participant that can settle
transactions without using an intermediary. If not a direct participant, a participant will need to use the
services of a direct participant (correspondent bank) to perform payments and settlements on its behalf.
A correspondent bank services transactions (on behalf of the domestic bank) that originate in a foreign
country which the domestic bank cannot serve directly without opening a branch in that foreign country.
5
liquidity to the same extent as in normal conditions. For example, availability of secured
funding might be reduced by means of higher haircuts or higher perceived counterparty risk.
Counterparty banks may withdraw unsecured funding, making it unavailable as a liquidity
source (e.g. uncommitted credit facilities). Banks delaying payments during stress periods
elevate liquidity stress within the payment system even further.
Item
Intraday liquidity stress
Contingent actions
1
A lack of available intraday liquidity at the beginning of
the day to cover the expected time-critical obligations
during the day reduces the bank’s flexibility to deal with
unexpected intraday outflows.
Increase portion of
unencumbered assets on the
bank’s balance sheet.
2
A bank will struggle to settle intraday payments when the
amount of intraday liquidity available at the beginning of
the day is small relative to the potential impact of a
stressed intraday liquidity event.
Convert collateral pledged at
central banks into intraday
liquidity (cash) in case of a
stressed liquidity event.
3
The bank bears a risk of failing to make intraday
payments when the amount of available intraday liquidity
sources at the beginning of the day is consistently lower
than the expected intraday liquidity usage.
Increase portion of
unencumbered assets on the
bank’s balance sheet.
4
Correspondent banks become vulnerable to liquidity stress
themselves when other banks are mostly relying on
correspondent banking services for their payment
activities.
Local regulator needs to
understand how
correspondent banks mitigate
intraday liquidity risk.
Banks that consistently delay intraday payments directly
or indirectly cause intraday liquidity stress to other
participants in the LVPS.
Local regulator must identify
behavioral changes in how
banks manage intraday
liquidity risk.
5
Table 2: Causes of intraday liquidity risk
Table 2 illustrates possible causes of intraday liquidity risk and corresponding mitigating
actions. In some cases, actions are needed from bank’s senior management. In other cases,
corrective measures by the local regulator are required. The next section explains BCBS’s
view on how intraday liquidity risk can be measured and monitored.
4
Measuring intraday liquidity risk
BCBS (2013) recommends that banks include a time stamp on all intraday cash flows in and
out, such that at the end of the month (retrospectively) an intraday liquidity report can be
provided to the local regulator. The intraday liquidity risk monitoring tools presented in BCBS
(2013) provide regulatory supervisors insight into a bank’s intraday liquidity position under
normal conditions. In order to understand how stress scenarios impact intraday liquidity,
BCBS (2013) also defined four stressed scenario conditions. This section provides insight into
both the monitoring tools and intraday liquidity stress scenarios defined by BCBS (2013).
4.1 BCBS intraday liquidity risk monitoring tools
BCBS (2013) translated the sound principles of intraday liquidity risk management into a
number of intraday liquidity risk monitoring tools. Since no single monitoring tool provides a
sufficient overview on the bank’s liquidity risk, seven monitoring tools have been identified
for reporting purposes to the local regulator. These intraday liquidity risk monitoring tools
6
have been split into three categories, i.e. monitoring tools applicable to (A) all reporting
banks, (B) reporting banks providing correspondent banking services to other banks and (C)
reporting banks that are direct participants. For each category, the corresponding monitoring
tools are explained below. See Table 3 for more details.
Monitoring
Tools
Description
Requirements
A1
Daily maximum
intraday
liquidity usage
Report the 3 largest net (positive and
negative) cumulative balances
between payments made and
received under normal conditions as
well as the average during the
reporting period.
Monitor all cash flows in and out
at various points in time during
the day5. Minimum amount of
intraday liquidity must be at least
equal to the largest net negative
balance.
A2
Available
intraday
liquidity at start
of business day
Report the 3 lowest values of
intraday liquidity available at the
start of the business day (by
constituent) as well as the average
during the reporting period.
Need for enhanced transparency
on intraday liquidity sources.
Breakdown intraday liquidity
sources into its constituent
elements (See Section 2).
A3
Total payments
Report the 3 largest daily values of
gross payments sent and received as
well as the average during the
reporting period.
Measure the overall size of the
bank’s payment activities each
day.
A4
Time-specific
and
critical
obligations6
Report the 3 largest cumulative
values of the time-specific and
critical obligations intraday as well as
the average over the reporting
period.
Monitor and cumulate the timespecific and critical obligations
during the day that should not be
failed.
B1
Value of
payments made
on behalf of
correspondent
banking
customers
Report the 3 largest daily gross
values of intraday payments made
on behalf of customers that use the
bank’s correspondent banking
services as well as the average
during the reporting period.
Enhance understanding and
calculate the total daily gross
value of payments the bank
makes on behalf of all its
customers that use correspondent
banking services.
B2
Intraday credit
lines extended
to customers
Report the 3 largest total amounts of
intraday credit extended to
customers (of which secured,
committed and peak usage).
Monitor the total amount of
intraday credit extended to
customers each day.
C1
Intraday
throughput
Report the daily average of the
percentage throughput that settles
each hour during the day.
Monitor the percentage of
outgoing payments (relative to
total payments) that settles on
specific times during the day.
Cat.4
Table 3: BCBS intraday liquidity risk monitoring tools
Retrospectively measuring and reporting the monitoring tools to the regulator does not
prevent banks from running the risk of negative net liquidity positions at certain points
during the day. In these instances, banks need access to its intraday liquidity sources. By
4 Category A (all reporting banks), Category B (correspondent banks) and C (direct participants).
5 For direct participants, the net position is the change in its opening balance with the central bank. For
banks that rely on one or more correspondent banks, the net position represents the change in opening
balance on the account with the correspondent bank during the day.
6 Time-critical obligations are: (1) obligations for which there is a time-specific intraday deadline, (2)
obligations required to settle positions in other payment and settlement systems, (3) obligations related
to market activities (e.g. margin requirements) and (4) other payments critical to the bank’s reputation.
7
having an amount of
intraday liquidity available that is at least equivalent to the largest
negative net intraday liquidity position measured over time, unnecessary reliance on
additional intraday liquidity sources can be reduced (also lowering accompanying costs).
Another consideration is that collateral located in other jurisdictions may only be included in
the computations of the monitoring tools when the bank can prove that the collateral can be
freely transferred intraday to where it is needed. This is especially relevant for banks that
rely on multiple payment systems for multiple currencies in various jurisdictions.
The monitoring tools for correspondent banks (i.e. total value of payments on behalf of
correspondent banking customers and the total amount of intraday credit extended to
customers) provide local regulators insight into the degree to which correspondent banks are
exposed to intraday liquidity risk. Using intraday throughput, regulators can monitor any
behavioral changes in how direct participants manage their intraday liquidity over time and
the probability of spill-over effects to other banks.
4.2 Definition of intraday stress scenarios
The BCBS monitoring tools provide insight and transparency into a bank’s intraday liquidity
profile under normal conditions. Since normal conditions do not always prevail, intraday
liquidity sources and uses can substantially change during times of stress. BCBS (2013)
defined the following four stress scenarios (behavioral assumptions) in Table 4.
Scenarios
Scenario description
Financial stress
The bank suffers or is perceived to be suffering from a stress event which causes
counterparties to defer payments and/or withdraw intraday credit lines. In such an
event, a direct participant must fund more of its payments from its own sources of
intraday liquidity in order to avoid deferring its payments. Banks using
correspondent banking services must either pre-fund payments or collateralize
intraday credit lines.
Counterparty
stress
A counterparty suffers from a stress event when it is not able to make its
payments on time. In this case, both direct participants and banks that use
correspondent banking services cannot (fully) rely on incoming payments from the
stressed counterparty. This is expected to increase uncertainty because the bank’s
available amount of intraday liquidity is lower than expected.
Customer
bank’s stress
In this event, a correspondent bank's customer bank suffers liquidity stress. This
will cause other banks to defer payments to the customer bank, making the
correspondent bank more vulnerable to intraday liquidity stress as well.
Market-wide
(credit or
liquidity) stress
Market-wide (credit/liquidity) stress could negatively impact the value of liquid
assets the bank holds to meet its intraday liquidity obligations. In case credit
ratings of unencumbered liquid assets deteriorate (i.e. haircuts increase), the
ability to raise intraday liquidity from the central bank or correspondent banks will
be constrained. In the worst case, certain assets end up not being eligible for
central bank’s liquidity facilities. Banks that rely heavily on cross-currency basis
swaps to manage intraday liquidity face considerable intraday liquidity risk in case
the currency swap market becomes distorted. Money markets could be negatively
impacted as well.
Table 4: BCBS intraday liquidity stress scenarios
Banks are asked to determine the impact of stress on their intraday liquidity position. For
this purpose, banks are recommended to use their core systems and tools as much as
possible, when estimating the impact of stress. The above stress scenarios will be used by
8
the regulator to estimate how resilient the bank’s intraday liquidity position is under stressed
conditions. Stressed outcomes will also be used by the regulator to judge the quality of the
bank’s contingency plan.
4.3 Developing a contingency plan (synopsis)
Banks do not need to report the impact of stress scenarios on the monitoring tools to the
regulator. They should use the outcomes of the stressed scenarios to understand how their
intraday liquidity profile changes under stressed conditions and define a proper contingency
action plan.
Aspects
Stress
Category
Assess
impact on
monitoring
tools7
Contingent
action
plan8
Assessment of the bank’s resilience to intraday liquidity stress
Own financial
stress
Counterparty
stress
All reporting banks
All reporting banks
Direct
Corresparticipondent
pants
banks
A1
A1
A2
A2
A3
A3
A4
A4
C1
---Convert collateral
and unencumbered
assets into cash in
case of negative
net intraday
liquidity (S2, S3).
Direct
Corresparticipondent
pants
banks
A1
A1
A2
A2
A3
A3
A4
A4
C1
---Restrict secured and
unsecured funding
(credit lines) made
available to stressed
counterparty (U2).
Prioritize timecritical obligations;
limiting reputational
damage and spillover effects (U1).
Contribute to smooth
functioning of
payment systems
and prevent
reputational damage
and spill-over risk
(U1).
Monitor intraday
throughput to
identify changes in
direct participant’s
payment and
settlement
behaviour.
Reduce own balances
on accounts with
stressed counterparty
to a minimum (S5).
Customer
bank’s stress
General market
stress
All reporting banks
Correspondent
banks only
A1
A2
A3
A4
B1
B2
Restrict secured
and unsecured
funding available
to stressed
counterparty
(U2).
Continue to
smooth
functioning of
payment
systems; prevent
reputational
damage and spillover risk (U1).
Direct
Corresparticipondent
pants
banks
A1
A1
A2
A2
A3
A3
A4
A4
C1
---Monitor all intraday
liquidity sources
impacted by
general market
stress (S2, S3, S4,
S5, S6).
Monitor and restrict
secured and
unsecured funding
(credit lines) made
available to
perceived stressed
counterparties (U2).
Continue to smooth
functioning of
payment systems;
prevent damage of
reputation and spillover risk (U1).
Monitor secured and
unsecured funding
and payments
received from
stressed counterparty
(S4, S6).
Table 5: Intraday liquidity contingent action plan
7 See Table 3 for categorization and numbering of BCBS (2013) monitoring tools.
8 Numbering of aspects according to intraday liquidity sources (S) and used (U) as shown in Table 1.
9
Table 5 explains which monitoring tools can be used to assess the impact of various stress
scenarios and what contingent actions are potentially available. This table also provides a
good basis for understanding which banking (transaction or service) activities are the main
contributors to intraday liquidity risk during stressed conditions as well as discussing with the
regulators the resilience (breadth and depth) of the contingency plan.
5
Implementing an ILM framework
In order to ensure that (1) payments and settlements run smoothly throughout the day
(even during stressed times) and (2) the bank is compliant with regulatory requirements (i.e.
reporting monitoring tools), the bank’s intraday liquidity risk management framework needs
to be improved. Most banks are expected to face considerable challenges when implementing
a robust ILM framework.
Goals
Aspects
Requirements
 Obtain a holistic overview on the intraday liquidity position by
currency, payment system and jurisdiction (e.g. beginning
balance, cumulative net cash flows in and out during the day and
the end-of-day liquidity position);
 Prioritize and plan time-critical intraday obligations in advance
(i.e. at the beginning of the day);
 Limit occurrences of excessive negative net intraday liquidity
Intraday
liquidity
dashboard
Active
management
positions by actively managing the mismatch between outgoing
payments made and incoming payments received. This is
expected to reduce a bank’s intraday liquidity risk and
(unexpected) need to access intraday liquidity sources;9
 Make changes in intraday liquidity sources and uses transparent;
 Enhance insight into businesses’ intraday liquidity usage and
associated costs;
 Reflect intraday liquidity risk into pricing of banking transactions
and services.
 Exercise proper governance and control over intraday liquidity
Internal
oversight
Governance
and control
risk by defining the three layers of defense (e.g. defining and
monitoring intraday liquidity risk limits);
 Define responsibilities, escalation process and actions in case of
an intraday limit breach.
 Comply with regulatory requirement by (retrospectively)
Regulatory
compliance
Reporting
monitoring
tools
calculating and reporting the BCBS intraday liquidity monitoring
tools at the end of each month;
 Define and evaluate the impact of stress scenario conditions on
intraday liquidity to support discussions with regulators on the
resilience of the developed contingency plans.
Table 6: Robust intraday liquidity requirements
9 Especially for large banks offering correspondent bank services across multiple jurisdictions,
settlement systems and currencies, it is crucial to plan large value payments (of which some of those are
time-critical) as much as possible aiming to minimize intraday liquidity usage and to prevent
unnecessary utilization of liquid assets on the balance sheet (e.g. unencumbered assets becoming
encumbered). Banks that use correspondent banking services often have access to intraday credit
facilities from the correspondent bank in case they don’t have sufficient cash on the account with the
correspondent bank.
10
5.1 Robust intraday liquidity management
A robust intraday liquidity risk framework is more than just the ability to report the
monitoring tools to the regulator. The monitoring tools do not require banks to manage
intraday liquidity risk in a real-time manner, but only ask banks to report intraday liquidity
positions retrospectively. A robust framework goes one step further and enables banks to
effectively measure, monitor and actively manage the bank’s intraday liquidity position in
real-time. Table 6 explains the requirements of a robust ILM framework.
Implementation of a robust risk framework that satisfies these requirements will be timeconsuming and resource-intensive exercise for banks. Complexity increases when the bank
provides correspondent banking services to others or when the bank operates in multiple
jurisdictions, currencies and across various payment and settlement systems.
5.2 System and organizational challenges
These days most banks manage intraday liquidity risk in a rather fragmented and often
inefficient manner. Regulatory compliance will confront banks with a number of challenges
related to multi-functional data issues and system requirements. These challenges can widely
differ across banks depending on their size and structure, whether they are direct
participants or not and to the degree they rely on or provide correspondent banking services.
Following an in-depth assessment with financial institutions, SWIFT (2014) concluded that a
large number of banks have only a small portion of their payments tagged with an intraday
time stamp (timed information). Also, a small portion of the correspondent banking
payments exchanged are currently confirmed intraday. The challenges banks face when
implementing a robust intraday liquidity risk framework relate to (1) data sourcing, (2) data
centralization and consolidation, (3) regulatory reporting, (4) building an intraday liquidity
dashboard and (5) governance. See Table 7 for more information.
Not many correspondent banks are able to provide customer banks with intraday transaction
data and balances let alone providing the data with a proper time stamp or in a sufficient
degree of granularity. Most correspondent banks currently provide end-of-day settlement
statements only. For correspondent banks it will be costly to continue serving other banks
with corresponding banking services while providing them with the required timed
information. Besides data availability, data quality is also an issue. Any output from a system
which is not able to provide data with an intraday time stamp is basically useless for intraday
liquidity monitoring and reporting purposes. Systems that overwrite a prior balance with the
most actual cash balance won’t be able to store intraday variations. This makes it impossible
to comply with regulatory requirements.
Dovetail (2014) also refers to a shift in risk managers’ mindset from ‘end-of-day thinking’ to
‘real-time thinking’. Manual business processes that used to take one day were suitable for
end-of-month reporting cycles. However, these types of business processes cannot be used
when it needs to be refreshed almost real-time. This could expose a bank’s structural
problems, deeply nested in its operations, to the local regulator.
11
Compliance with regulatory requirements and the implementation of a robust intraday risk
management framework force banks to cope with the above challenges. This coincides with
significant expenditures in systems, automatization as well as management attention. In
today’s banking environment, where margins are under pressure, banks might not be willing
to make these expenses. They focus on incremental improvements to their existing systems
first. On the other side, the question remains: “What is the risk and accompanying cost of
non-compliance with regulatory requirements?”
Challenges
Scope
Description
 Defining internal data requirements for regulatory compliance and
define additional internal data requirements for implementing an
intraday liquidity dashboard;
 Obtaining timed information (transactions and balances) from
multiple functions within the organization (e.g. treasury, payments
& settlements, collateral management etc.);
Internal
 Locating and sourcing internal data that is fragmented over a
number of internal systems;
 Aligning granularity and format of internal data to the requirements
implied by regulatory compliance (reporting) and liquidity
dashboard;
Sourcing
 Amending and automating internal data gathering processes (where
possible).
 Defining external data requirements for regulatory compliance;
 Obtaining intraday transaction data and balances from one (or
External
more) correspondent banks and handle information in proprietary
data formats from correspondent banks;
 Deciding on common granularity, format and automated processing
of external data.
 Centralizing and storing internal (multi-functional) data and external
data into one (or more) data bases each day (reflecting agreed
granularity and format);
Centralization
and
consolidation
 Consolidating timed information across all operations, currencies
Internal
and jurisdictions serving purpose of reporting BCBS’s intraday
monitoring tools each month to local regulator;
 Centralized database(s) also provides basis for building an intraday
liquidity dashboard;
 Automating data processing as much as possible.
 Defining the monthly regulatory reporting process (including
Regulatory
reporting
Internal
responsibilities) and build a tool that calculates the intraday liquidity
monitoring tools at month-end (see Table 3);
 Deriving and agreeing on a contingency plan from stressed scenario
outcomes (see Table 4).
Liquidity
dashboard
 Constructing a dashboard that provides an holistic overview and
Internal
allows for active management of the bank’s intraday liquidity
position (see requirements in Table 6).
 Monitoring the net intraday liquidity positions versus limit(s);
Governance
Internal
 Defining and building internal management report on intraday
liquidity risk (MIS).
Table 7: Challenges implementing a robust ILM framework
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6
Benefits of managing intraday liquidity risk
Being able to actively manage the bank’s intraday liquidity position is a costly exercise as
explained above. Banks can also reap significant benefits. The following potential benefits
exist from an improved intraday liquidity risk management framework.
Funds transfer pricing: Funds transfer pricing ensures risk is properly reflected in pricing
of products or services. All efforts directed to improving transparency help to identify which
businesses or clients are consuming the bank’s intraday liquidity. Banks should apply a clear
cost-by-cause principle 10 . Transparency on the usage of intraday liquidity provides an
informed basis for pricing and allocating intraday liquidity costs to their activities
(businesses) and clients. Businesses and clients that need access to significant amounts of
intraday liquidity should also bear most of the costs associated with it. Transferring the
appropriate amount of intraday liquidity costs to a business enhances insight in the true
economic value performance of a business. Properly reflecting intraday liquidity costs into
pricing of products (e.g. committed or uncommitted intraday credit lines), also provides
banks the opportunity to (dis)incentivize products depending on their actual intraday liquidity
position.
Collateral optimization: Collateral optimization reduces operational costs. Assets and
collateral reserved for payment and settlement activities can be substantial, but cash and
collateral held for these purposes come at a cost. These assets yield minimal returns. In
recent years, banks have increased their focus on and became smarter in managing their
collateral pool of assets. Active management of intraday liquidity risk further contributes to
managing the collateral pool of assets in a more optimal and efficient manner. This is
expected to reduce costs. A better understanding and accurate projection of intraday liquidity
throughout the day also allows for a more accurate view of how much collateral is really
needed for intraday liquidity purposes. Excess collateral can now be used more economically
elsewhere within the firm, be it to support activities internally or externally in the money
market.
Competitive advantage: Correspondent banks that have insight as well as the capability to
actively manage their own intraday liquidity position can also do so for other customers by
providing them with real-time information on their intraday positions. Improved visibility
over all intraday cash in- and outflows has substantial value to banks that rely on
correspondent banking services, because they can also comply more easily with regulatory
requirements on intraday liquidity. Correspondent banks can help customers understand and
explain their intraday net cash balances as well as advise them on how they can alter their
payment profile in order to reduce their reliance on additional intraday liquidity sources and
usage of collateral. For correspondent banks, this can potentially result in a commercial
advantage or even a competitive advantage in the marketplace. As a result, both
correspondent banks and their customers can potentially find a mutual benefit.
10 Regulation on liquidity requires that banks properly manage and price liquidity risk in all of their
products, services and trading activities. This also includes intraday liquidity costs.
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7
Conclusion and next steps
Intraday liquidity risk is the least managed part of liquidity risk management within banks.
Regulation on intraday liquidity risk management is another example of regulation making
banking more costly. Significantly more spending – both in terms of time and money – is
needed to comply with regulatory requirements. Banks will be confronted with various
internal and external data sourcing and system problems before they can report the
monitoring tools to the regulator and have an intraday liquidity dashboard in place. This
liquidity dashboard improves transparency, provides an holistic view on intraday liquidity risk
and enables the bank to actively manage its intraday liquidity position.
The (immediate) cost for implementing a robust intraday liquidity risk management
framework must be balanced against the benefits in the long-term. Due to improved
transparency, a bank is able to accurately reflect risk in pricing of products and services as
well as identify which business should absorb most of the costs associated with intraday
liquidity risk. This allows for some degree of business incentivization. Actively managing
intraday liquidity risk also reduces costs, because it enables the bank to manage the pool of
collateral assets in a better and more efficient manner. Collateral assets can be put to use
elsewhere in the organization or in the money markets, thus enhancing returns.
In this context, banks need to realize what the cost of non-compliance will be when
balancing short-term costs against the longer-term benefits. The consequence of inaction or
inadequate action by a bank can either result in penalties (direct costs), higher capital
requirements (indirect costs) or in the worst case longer-term opportunity losses due to
erosion of its competitive advantage. Banks need to ensure that they focus on and comply
with regulatory requirements first. Tackling data sourcing and system problems will consume
a significant amount of time. Afterwards, banks can decide to shift attention to building an
intraday liquidity dashboard that allows for active management of the bank’s intraday
liquidity position.
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