Why liquidity management needs to evolve beyond interest rates

Recently, the Federal Reserve made headlines with a significant rate cut, sending ripples across the financial world. As treasurers and liquidity managers grapple with what this means for their institutions, one thing remains clear: liquidity management cannot be dictated by interest rates alone.

Historically, liquidity and interest rates have been closely linked, and many treasurers have taken rate cuts as a signal to relax their liquidity strategies. But this approach, especially in response to these recent actions, shortchanges earnings potential and increases balance sheet risk. The truth is, good liquidity management is essential regardless of the interest rate environment.

While a lower interest rate might seem like a reduced liquidity risk and a lower cost of holding cash, it’s critical to recognize the bigger picture. There is always a spread between funding costs and unused liquidity. This means risks don’t necessarily disappear with lower rates – they just change form. Treasurers who view rate cuts as an opportunity to scale back on liquidity oversight are doing so at their own risk.

Navigating liquidity beyond rate movements

Treasurers and liquidity managers should be focusing on real-time data, cash flow drivers, and long-term business goals rather than letting rate cuts guide their decisions. The Federal Reserve’s latest rate cut might ease short-term costs, but the underlying risks of holding excessive short-term liquidity remain. Liquidity managers must leverage intelligence tools to forecast, detect anomalies, and manage flows, especially in volatile times like these.

Treasury product owners and other stakeholders have a huge opportunity right now to capitalize on efficient liquidity management practices, regardless of what the Federal Reserve does next. By focusing on business drivers and using advanced intelligence to manage cash in real time, treasurers can minimize risk and maximize earnings potential in any rate environment.

Why real-time data is key

The biggest lesson from recent bank failures is that rate changes do not excuse poor liquidity management. Banks that over-focus on interest rates and fail to develop robust, real-time liquidity oversight are vulnerable, even in low-rate environments like the one we’re entering. With today’s instant and digital payments, real-time, harmonized data is crucial to managing short-term and intraday cash flows effectively.

A wake-up call for treasurers

The Federal Reserve’s latest move is a reminder that liquidity management needs to be driven by sound fundamentals, not just interest rate movements. Over the last two decades, most major bank failures have been due to liquidity issues, not interest rate fluctuations. For treasurers, the focus should now be on building automated tools and using real-time data to protect their institutions from risk, regardless of what the Federal Reserve does next.

It’s time to stop worrying about interest rates and start managing liquidity intelligently. In the long run, it’s the banks that invest in data-driven, real-time liquidity solutions that will stay resilient through any market changes. To find out more about how SAP Fioneer can help banks tap into the future of liquidity management, get in contact with us here.

Author: Joel Feazell, Head of Liquidity Management Platform