Driving High Performance in Payments with Intra-Day Liquidity and Collateral Management

A 2011 study revealed that internal fragmentation of global collateral management costs banks over €4 billion per year. This report examines eight building blocks for managing liquidity effectively.

Over the past decade, liquidity risk has overtaken market risk to become the top priority of many financial services executives. Members of the banking industry have responded to rising liquidity scrutiny and costs in several ways, including internal pricing mechanisms and forecasting, with mixed results.

Developed in association with The SEPA Consultancy, this report outlines eight building blocks that banks can use to manage intra-day liquidity and collateral effectively.

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In the years leading up to the 1998 Russian Bond crisis, market risk was poorly understood and significantly under-resourced among banks. A decade later, Lehman Brothers’ experience showed that the industry had simply replaced one blind spot with another.

In a 2011 Gartner report, financial services CEOs and CIOs voted cash and liquidity conservation as their top concern for 2011 and 2012. The growing regulatory focus on liquidity has increased the cost of liquidity reserves for most banks, from less than 1 percent before 2008, to between 2 and 3 percent per year. As a result, weaker and smaller financial institutions are being forced out of the market.

A 2011 Accenture study, conducted in association with Clearstream, found that internal fragmentation of global collateral management costs banks more than €4 billion per year.

The eight most common challenges to effective collateral management are:

• An incomplete overview of collateral.
• An inability to manage collateral centrally.
• An inability to maximize liquidity.
• Suboptimal internal governance, leading to misaligned objectives.
• Inadequate internal transfer pricing.
• Insufficient optimization engines.
• An inability to forecast inventory.
• Excessive staff costs due to process complexity.
  
  

Banks can improve their performance in this area by maximizing liquidity to lower the cost and tenor of funding, and reducing or eliminating over-collateralization.

Accenture has identified eight building blocks to help banks move toward real-time, integrated intra-day liquidity and collateral management:

• A single, global view: Centralizing all accounts, payments and related collateral in a single dashboard improves global visibility of the cash and collateral balance sheets.
  
  
• Internal clearing: Using internal debit and credit capabilities instead of external SWIFT messages to transfer money internally is faster, cheaper and more secure.
  
  
• Automated decision making: By automating and integrating processes, banks can reduce the time required to turn collateral into cash from more than one hour to less than two minutes.
  
  
• Real-time alerts and information: Real-time alerts and management information flows can help banks catch errors before they enter clearing and settlement systems.
  
  
• Clearing and settlement systems with track and trace capabilities: Real-time track-and-trace capabilities can help banks improve intra-day cash movement and liquidity forecasting.
  
  
• Intra-day forecasts and reconciliation: Blending real-time information and forecasts enables banks to pinpoint unexpected events and take appropriate actions.
  
  
• Behavioral analysis: Modern behavioral analysis tools can forecast the timing and nature of more than 90 percent of payment flows, and real-time tracking can alert banks to unexpected patterns.
  
  
• Transfer pricing: An internal transfer pricing mechanism can be used to reward or penalize entities that enhance or weaken liquidity.