These recommendations are designed to strengthen a bank’s ability to manage liquidity effectively during the day, enhancing resilience against potential crises. This blog is based on insights shared during our recent live stream, where our experts unpacked the ECB’s guidelines and discussed their implications for banks. If you’d like to delve deeper, we invite you to watch the full recording below.
Why Intraday Liquidity Matters
The 2008 financial crisis and recent failures, such as Credit Suisse in 2023, highlight how insufficient intraday liquidity management can lead to bank failures. Managing intraday liquidity risk is critical to ensuring payments are processed smoothly, even under stress, and preventing disruptions to financial systems.
The ECB’s Focus on Intraday Sound Practices
The ECB has identified seven core principles and over 60 recommended practices, categorised as either:
- Key: Fundamental practices every bank must implement.
- Good: Advanced, aspirational practices for more mature organisations.
These guidelines provide a structured framework for banks to assess and improve their intraday liquidity management.
Breaking Down the Principles
1. Monitoring Intraday Liquidity
Banks need tools for real-time monitoring across all key accounts, including:
- Cash and securities positions.
- Both material and non-material currencies.
- Alerts for deviations from expected activity. Real-time reconciliation between forecasts and actual activity is essential.Forecasting Payments
2. Forecasting goes beyond static models. Banks must:
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- Predict end-of-day balances using historical patterns and update with real-time data.
- Continuously update forecasts as new information becomes available. This proactive approach ensures better preparedness for unexpected changes.
3. Managing Payment Outflows (Throttling)
The ECB emphasises the ability to:
- Prioritise critical payments during stress periods.
- Delay non-essential payments if liquidity becomes constrained. This capability minimises systemic risk while ensuring timely execution of essential transactions.
4. Stress Testing
Stress testing is crucial to ensure intraday liquidity buffers are fit for purpose. Banks should:
- Run daily tests based on previous day’s intraday data.
- Evaluate multi-currency impacts and scenario-specific liquidity needs. Dedicated intraday buffers separate from broader liquidity reserves are explicitly a must have.
Governance and Risk Management Framework
A robust framework is foundational to managing intraday liquidity risk effectively. Banks must:
- Align intraday policies with overall liquidity risk management policies.
- Clearly define roles and responsibilities across Treasury, Risk, and Operations.
- Escalate issues to senior management or the Asset and Liability Committee (ALCO) when necessary.
- Regularly review and update policies based on market conditions.
Proactive Steps for Banks
The ECB’s guidelines serve as both a compliance mandate and an opportunity for improvement. Banks should:
- Conduct a Gap Analysis: Assess current practices against the ECB’s principles to identify improvement areas.
- Implement Real-Time Tools: Invest in technology to monitor, forecast, and manage liquidity dynamically.
- Build Cross-Functional Teams: Involve Treasury, Risk, and Operations to ensure a cohesive approach.
- Engage Supervisors Early: Discuss vulnerabilities and remediation plans proactively with regulators.
Looking Beyond Compliance
While compliance with these guidelines is essential, they also offer strategic benefits:
- Improved cash positioning and cost optimization.
- Enhanced business decision-making through better data visibility.
- Reductions in the size of costly liquidity buffers and credit lines.
Final Thoughts
The ECB’s guidelines are a timely reminder of the importance of robust intraday liquidity management. Whether your bank is directly supervised by the ECB or operates outside the Eurozone, these sound practices provide a valuable roadmap for enhancing resilience and operational efficiency.
By turning compliance into an opportunity, banks can not only meet regulatory expectations but also unlock long-term strategic benefits.
Looking for a solution? Go here to discover how Planixs’s Realiti platform is helping banks to comply with the ECB recommendations
