Revolutionizing liquidity management: Why banks need a more strategic approach

The collapse of Silicon Valley Bank and Credit Suisse sent renewed shockwaves through the international banking world, which is now calling for improving a critical vulnerability: liquidity management.¹ 

But liquidity management has grown more complex and not merely because of high interest rates. Market volatility and increasing demands for real-time settlements are the true drivers of the need for instant liquidity visibility.  

So, how can banks navigate these market and instant-payment pressures to ensure financial stability and growth opportunities? 

The answer lies in real-time liquidity intelligence.  

By modernizing liquidity management, not only can banks improve forecasting, manage risk, and ensure compliance for corporate treasurers and liquidity managers. They gain a competitive edge, enabling senior management to take a proactive approach in understanding key business drivers and navigating crises more effectively.  

Only a modern tool can enable banks to align their liquidity management strategies with their broader business needs, adding value to consumers and shareholders alike.   

In this article, we explore the key challenges of managing liquidity, the value of advanced, real-time solutions, and strategic recommendations for implementation.  

The challenges of bank liquidity management today

Bank liquidity management is the complex process of managing a bank’s cash positions, payment flows, and financial risks in real-time to ensure the bank has sufficient funds to meet its financial obligations and regulatory requirements. 

The key parts of liquidity management in banking include: 

• Cash position tracking. Banks monitor intraday cash flows across multiple payment systems and track funds across different currencies and legal entities to understand money movement and financial risk transfer. 

• Forecasting and prediction. Banks need to anticipate liquidity pressures by predicting end-of-day cash positions so they can identify potential financial risks or crises. 

• Regulatory compliance. Banks need to meet certain regulatory expectations around liquidity management, such as maintaining appropriate liquidity buffers, so they can demonstrate their ability to manage financial risks to regulators.  

• Payment management. Controlling payment flows is crucial in a bank’s liquidity management process. They need to prioritize time-sensitive payment obligations and ensure critical payments are processed efficiently. 

• Risk mitigation. To prevent potential liquidity crises, banks must detect and correct anomalies as they happen to ensure they meet the necessary cash reserves and collateral requirements. 

So, what’s preventing banks from managing their liquidity adequately? Multiple factors play a part.

1. The impact of outdated systems on liquidity management  

Various mergers and acquisitions throughout the years have taken a toll on the banking world’s current liquidity management systems. Legacy treasury systems intertwined with modern payment software solutions and disparate data warehouses have created data silos, preventing banks from tracking liquidity in real time across their organization. 

Fragmentation makes harmonizing liquidity-related data across disparate legal entities and multi-currencies a significant technical challenge.  

Banks often rely on manual processes to gather data from these different sources, reconcile it, and then forecast their liquidity positions. Insights may come in batches or even at the end of day, making intraday liquidity forecasting impossible and delaying crucial information on which to base decisions.  

For example, a bank with multiple automated clearing house (ACH) and wire systems must reconcile their balances manually. But this resource-intensive process introduces the likelihood of errors, increases risk, and slows decision making. 

2. The cost of poor forecasting and liquidity visibility 

Without real-time insights, gaps in liquidity can prove costly.  

A lack of holistic, real-time data on cash flows and positions has multiple ramifications. It forces banks to secure emergency funding at higher costs, undermining their profitability, financial health, and strategic financial planning.  

Any inaccuracies in liquidity reporting and forecasting also impact business strategy (on local and international levels), cash product pricing, and capital allocation, ultimately influencing earnings and shareholder value. 

For instance, a mid-sized bank that underestimates its liquidity needs will need to borrow cash at premium rates to avoid shortfall penalties, reducing its revenue.  

External factors such as interest rate volatility, inflation spikes, market downturns, and geopolitical events only exacerbate these liquidity pressures and emphasize the need for advanced liquidity management systems.  

3. Increased regulatory scrutiny on liquidity accuracy 

The liquidity crises of Silicon Valley Bank (SVB) and Credit Suisse have underscored the need for proactive cash management. 

Considering these bank runs and the increasing demand for accuracy, the European Central Bank (ECB) ranked effective liquidity management as a key area of improvement and offers extensive best practices to help banks mitigate liquidity risk.  

Even with additional guidance, banks still come under greater scrutiny because of these collapses. Stricter Basel III liquidity and capital requirements now extend to Tier 2 and 3 organizations and involve real-time liquidity monitoring even for banks with assets under $250 billion.  

Banks must be more conservative with their liquid assets to meet these new requirements. But this is both capital intensive and an operational burden. 

In addition, banks must now be able to demonstrate they can both understand and manage their cash flows and liquidity positions, and document these in real-time reporting that is not only accurate but offers valuable insights.  

While this reporting meets regulatory requirements, it serves a dual purpose by also providing crucial intelligence that senior management should use to drive business-informed decisions. 

The evolving regulatory landscape is forcing banks to transform liquidity management from a reactive, burdensome compliance exercise into a proactive strategic lever for sustainable growth.

The role of an advanced liquidity management system for banks 

Only a ready-built solution that harmonizes bank data, automates liquidity monitoring, and offers real-time updates can manage the challenges of forecasting, reporting, and risk management across a bank’s operations. 

An advanced, data-driven system enables treasury, liquidity, and payment operation managers to go beyond compliance. With business intelligence at hand, senior managers can create operational efficiencies and enhanced insights to improve a bank’s overall financial performance. 

Here is how an advanced liquidity management system can turn liquidity management into a proactive and strategic business tool.  

Real-time liquidity tracking and forecasting 

An ideal liquidity management system (LMS) can provide automated, real-time monitoring of liquidity positions across multiple accounts. With it, banks gain visibility and control over cash flow, payments, receivables, and collateral, improving cash flow forecasting accuracy. 

Banks can compare current liquidity to expected values and checking deviations (e.g., within one standard deviation or two percentage points), detect anomalies, and predict shortfalls.  

For instance, a European bank identifies missing payments for the amount of $2 billion in real time. An LMS triggers an automated alert so the bank can move funds to cover the gap and prevent a shortfall.

Multi-entity, multi-currency data aggregation 

An LMS can aggregate complex, multi-dimensional data to provide banks with a unified view of their liquidity position globally, simplifying cross-border liquidity management. 

For example, an LMS would enable a multinational bank to consolidate cash positions across multiple currencies seamlessly. 

This eliminates manual oversight and allows for rapid responses when tracking issues arise. Here, global banks can identify missing transactions from their key counterparties with an LMS, helping them take action immediately.  

Compliance automation 

An advanced LMS enables banks to stay on top of their regulatory compliance reporting.  

Banks can fulfill requirements such as Basel III or the liquidity coverage ratio (LCR) with built-in reporting, automating this task and avoiding manual processes that lead to inaccuracies and errors. 

This enables banks to proactively measure, monitor, and manage short-term cash flows and liquidity positions and meet required liquidity buffers to avoid fines and penalties.  

Advanced optimization features for liquidity efficiency 

An advanced LMS offers intelligent payment flow controls to prioritize time sensitive financial obligations. Automatic alerting and anomaly detection provides a methodical, statistically driven approach for alerting and forecasting. 

For example, with an LMS, a bank can detect when their liquidity is off target (e.g., 10% over, 12% under) by receiving notifications that trigger when liquidity levels breach statistical thresholds. 

This functionality enables banks to not only take timely corrective actions but also optimize liquidity costs by identifying which business units drive funding expenses and effectively manage excess cash.

Build vs. buy: making the right choice  

Currently, banks can build their own LMS in-house or purchase an off-the-shelf system. We explore the reasoning between building an in-house LMS or buying a ready-to-use solution.  

Why some large banks choose to build 

Many large banks that have already invested millions in building their own liquidity management systems may be reluctant to switch to an off-the-shelf solution. 

They currently have the ability to fully customize their cash flow management system to specific business and operational needs and processes. This allows them to remain in full control of their system’s development, maintenance, and future enhancements.  

However, an advanced solution, like SAP Fioneer’s Liquidity Management System (LMS), can offer co-innovation packages, giving banks a foundational solution they can customize going forward.  

The hidden costs and time constraints of custom-built solutions 

Though in-house building lets banks tailor their liquidity management to specific business needs, it can cost millions of dollars and take years before arriving at an ideal system. 

The frequently changing regulatory landscape is one factor that slows down customization and inflates costs. Each year, banks need to constantly integrate and customize systems just to meet new reporting requirements.  

Customizing fragmented legacy systems is also resource intensive, typically needing 10 to 15 developers dedicated to this task over multiple years, increasing the investment needed to reach an optimal solution.  

How off-the-shelf solutions provide faster, more cost-effective implementation 

Ready-to-use solutions built specifically for bank liquidity management can offer lower investment and faster implementation.  

For example, an advanced solution provides built-in functionality banks don’t need to develop from scratch. Multi-currency, multi-entity data aggregation, real-time forecasting, and payment flow controls are already available. Data is automatically integrated and harmonized, enabling enhanced accuracy for liquidity reporting and forecasting.  

This means banks can deploy a ready-to-use LMS in months instead of years.  

As a software solution, an advanced LMS includes vendor support, maintenance, and updates. This enables banks to adapt to new compliance standards and integrate with new systems more easily, with no need for specialized staff to customize the process, reducing costs. 

Above all, an industry-specific LMS can help banks meet evolving regulatory requirements while benefiting from reporting that also acts as strategic business intelligence. 

Three key benefits of an advanced liquidity management system for banks 

Banks can benefit from LMS in multiple ways. 

1. Enhanced forecasting and real-time alerting 

An advanced LMS offers a data-driven approach that provides enhanced forecasting and real-time alerting that regulators favor. With this data, banks can see their cash positions, payment flows, and liquidity across multiple currencies and legal entities.

2. Automated anomaly detection for early risk mitigation

By proactively detecting anomalies, LMS provides early warnings to banks about potential liquidity pressures or issues. This enables banks to quickly investigate the root cause and take action to mitigate any emerging liquidity risks. 

3. Intelligent payment flow control for strategic liquidity positioning 

Highly customizable payment flow controls enable banks to prioritize and manage time-sensitive payment obligations based on available liquidity. This helps honor critical payments during liquidity crunches while offering valuable business intelligence, such as insights into which business lines are driving liquidity costs, to enhance strategic decision making. 

Paving the way to advanced bank liquidity insights 

Managing liquidity in real time is no longer optional for financial institutions—it’s a must in today’s volatile landscape.  

Instant insights do more than empower institutions to mitigate risks, optimize capital allocation, and swiftly respond to market changes. The valuable business intelligence real-time liquidity visibility provides is a necessity for all stakeholders—customers, management and shareholders alike—if banks want to survive turbulent times.  

But how can banks future-proof their liquidity management strategies quickly without inflating costs? 

SAP Fioneer’s Liquidity Management System (LMS) can be deployed in months instead of years at a fraction of typical in-house building costs. Designed specifically for banks, this ready-to-use solution provides the advanced liquidity insights, reporting, and forecasting functionality that enables banks to overcome their liquidity visibility challenges. 

With SAP Fioneer’s LMS, senior management can future proof their regulatory requirements and gain the real-time liquidity insights needed to guide key business decisions and manage market turbulence efficiently. Banks can ensure customers remain confident in the institution’s financial stability and shareholders enjoy revenue growth.  

Learn more about LMS and how it can transform your bank’s liquidity operations. Get in touch. 

Sources: 

1. Reuters – Central bank body calls for more detailed monitoring of bank liquidity risks