Financial institutions continue to struggle with the implementation of effective liquidity risk management strategies, a survey of industry experts has revealed. The key to overcoming these challenges is developing collaborative solutions to data management issues, according to a new SWIFT white paper entitled "Managing Liquidity Risk: Collaborative Solutions to Improve Position Management and Analytics" that analyses the survey's findings.
"The business and regulatory pressure for financial institutions to improve their liquidity risk management can’t be ignored," says Luc Meurant, Head of Banking, Supply Chain and Corporate Markets at SWIFT.
"The industry has to find solutions to the data management challenges and, in addition to internal integration projects, the answer lies in collaboration. Industry-level initiatives to address these issues are already starting to appear," says Meurant.
A previous SWIFT whitepaper and survey in 2010 concluded that effective liquidity risk management requires a top-down and bottom-up approach. Strategy, principles and objectives must be set at management and board level, while the liquidity dashboard and analytics must be obtained at the operational level. However, the 2011 survey found that data management challenges holding up progress in addressing liquidity risk issues have not yet been solved.
"Managing liquidity risk is a complex process that involves having the right monitoring and controls in place, as well as quantitative measures and reporting," adds Catherine Banneux, Senior Market Manager, SWIFT, "but until the right data is readily available at the right time, progress will be difficult."
Six Key Data Challenges
SWIFT's survey of 40 cash, liquidity and liquidity risk managers at financial institutions around the world identified six key areas in which data management needs to improve, to create:
- a view on intraday cash position across currencies (93%);
-ready-made liquidity risk analytics and business intelligence (91%);
advanced interactive cash and collateral management functionalities within payments infrastructures (89%);
- an ability to build predictive positions (88%);
- an intraday view of unencumbered collateral positions including margin calls (88%);
- an ability to manage and report liquidity positions at a firm-wide level (82%).
Delivering Real Savings
While regulation is a leading driver for improved management of liquidity risk, the business case to invest in real-time liquidity management goes beyond regulatory compliance and risk mitigation.
Getting it right can save banks a lot of money, too. Lack of intraday data can lead to late identification of gaps between forecast and real inflows, outflows and positions, resulting in substantial financial costs - due to over-collateralisation, intraday credit line costs, higher funding costs, overdraft charges and higher liquidity buffers.
Collaborative efforts to develop industry standards - an area of leadership and expertise for SWIFT - could deliver real savings for the industry.
Five Top Priorities
The good news is that survey respondents also identified five top-priority collaborative developments that would address these challenges, some of which could be implemented in a relatively short timeframe. They are:
- industry best practice for intraday cash reporting;
-common reporting standards and liquidity monitoring and control standards for use across high-value payments systems;
-a standard margin call solution to support the implementation of intraday feeds in liquidity management applications;
-industry best practice for collateral reporting for liquidity management purposes;
-a central ‘payment tracker/adviser' platform providing transactional status.
"The business and regulatory pressure for financial institutions to improve their liquidity risk management can't be ignored," says Meurant. "The industry has to find solutions to the data management challenges and, in addition to internal integration projects, the answer lies in collaboration. Industry-level initiatives to address these issues are already starting to appear."
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