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We only know the worth of liquidity once it is gone. 2023 was littered with banks that lost the good fight, and every one of them exposed liquidity challenges in the financial industry.
Regulators across the globe are intensifying their focus on liquidity management and the associated risks. The short version? According to the Single Resolution Board (SRB) –and the Fed, and the Swiss National Bank for that matter –a revolutionary shift towards real-time liquidity management has never been more urgent.
“Liquidity in resolution is the elephant in the room. Nothing new, but still an unsolved issue. Recent events in the US and Switzerland have shown that liquidity crises can happen fast –and be driven by social media and digital banking.”–Dominique Laboureix, 18th IESE Banking Sector Industry Meeting, Madrid, 2023
We have seen stakeholders are reluctant to roll over or lend money to a bank in crisis. We know that, depending on the resolved bank's business model, liquidity stress can endure after a successful resolution.
It's not surprising that the priorities of the SRB include a focus on enhancing crisis readiness and putting resolution techniques into practice. The SRB has asked many European banks to develop capabilities to understand and report their liquidity position at short notice (max.24 hours) and high frequency (more than once a day). There will also be an annual exercise to test capabilities.
What the SRB expects banks
The guidance focuses on the liquidity aspect of the SRB's earlier Expectations for Banks. Liquidity plays this critical role because the SRB’s expectations from 2023 onwards have been:
- Banks must develop the capabilities to report a predefined set of data points on their liquidity situation
- Banks must put in place remedial actions to mitigate any deficiencies in their capabilities
- Banks' internal frameworks, governance, and management information systems must be set up to meet the data expectations set out in the guidance, including the ability to forecast the net liquidity position across any period and at short notice.
SRB Chair, Dominique Laboureix says, “Our goal is to make sure that, if a major bank in the Banking Union gets into trouble, that we can deal with it swiftly, providing confidence to the market and the consumer, while not having to dip into taxpayers’ funds. The right information about liquidity is essential to achieve these goals.”
Real-time liquidity management is no longer ‘nice to have’
As outlined in the SRB’s Expectations for Banks, firms must develop methodologies to estimate pre-event liquidity needs, measure, report, and forecast liquidity during the process, and identify assets for collateral in resolution, while considering legal, regulatory, and operational obstacles under stressed conditions.
With the SRB's strategic shift, real-time liquidity management is no longer ‘nice to have.’ If you want to mitigate risk and make your money work harder, you need easy-to-access, real-time data at your fingertips. It is essential for compliance and the cornerstone of successful strategic growth
Download your free copy of the latest Financial Technologist magazine here.
