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> Cash Management Issues
Managing the liquidity recurs as an essential issue and necessitates to call established practices into question.
The early drivers for an active control of bank cash flows came from settlement risk across national payment systems.
On the one hand, the introduction of Real Time Gross Settlement (RTGS) payment systems has allow to formalise and automate controls to avoid excessive settlement risk exposure.
On the other hand, the regulatory pressure to take settlement risk out of financial markets and operations has continued to focus on liquidity.
The new Continuous Linked Settlement (CLS) solution for foreign exchange settlement risk has brought with it tight constraints and obligations for liquidity. A serious delay in one country's RTGS system could now, through CLS processes, lead to serious liquidity delays in other countries. This operational risk implies real time management of intra-day liquidity.
Another incentive lies in the forthcoming Euro high value payment system TARGET2 (planned for going live in January 2007), whose main principles and basic structure have recently been defined by the European Central Bank and which represents a step further towards standardisation and concentration. A primary objective is to build a scheme through which optimised collateral management and the principle of Grouping of Accounts will allow centralised Pooling of liquidity and will simplify links between RTGSs and SSS (Securities Settlement Systems). Thus, such a scheme will provide banks with the ability to reduce the cost of intraday liquidity.
Effective real-time intra-day liquidity management requires not only up to date reporting of cash flows, but also both prediction and reconciliation of expected cash flows for the day. Where settlement is achieved using direct clearing via RTGS payment systems, real-time reconciliation is straightforward. New moves in the market may address this information shortfall. Whereas full reporting by SWIFT FIN messaging is seen as too expensive, new real-time 'nostro account information' reporting, based on the new SWIFTNet services, could make it practical. In this scheme, banks could both position themselves as client of their NCB and as service providers for their banks customers.
Intra-day liquidity management concern, indeed, is also reaching corporate customers, who are very demanding of such services.
Banks lacking either metrics or direct controls will find themselves at the mercy of those who have control systems. They will also be perceived as operationally high risks, and will face the potential capitalisation of operational risk threatened by the Basle II accord.
This is why banks should react to the intra-day liquidity issue and devise their own business strategies within euro cash system before the issue starts to affect their competitive position.
