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Managing Liquidity for a Competitive Advantage

The art of accountability when it comes to liquidity management was the topic of a recent blog I posted. The premise behind that blog was that most banks have not mastered this art, but instead spread this responsibility between Corporate Treasury and Finance, depending on the purpose for which liquidity is being managed.

During the fall-out of the credit crisis, banks necessarily put this issue on the back burner. However, it’s now time for banks to create an environment of accountability that gives the industry a global competitive advantage. This includes improving the measurement and management of liquidity needs on a global scale for foreign currency payments, for retail credit systems such as ACH electronic funds transfers, and for meeting the demands of corporate customers who want real-time data from banks in order to manage their own liquidity.

Research and consulting firm Celent recently commented in a Corporate Boardroom Series report that corporate treasurers and CFOs in 2009 were focused on properly managing liquidity, more than ever alert to the fact that failure to do so can result in damage to reputation and potential insolvency. Evaluating which banks would do the best job at managing liquidity portfolios means, among other things, selecting those who can offer integrated visibility into cash accounts.

Additionally, according to AITE’s February 2008 Trends in U.S. Cash Management survey of the 50 Largest Banks, 80 percent stated that real-time balance information is “very important” to “extremely important” to their customers. Many of them already offer these capabilities and several banks have plans to offer them, the survey found. But implementation is often a challenge due to antiquated core systems, unintegrated systems and data feeds, AITE wrote.

Real-time information means real agility. Back when liquidity was easily accessible, it may have been a pain to rely on Excel to establish one’s own or a customer’s most recent (not real-time) liquidity position, but the high costs and risks of doing business this way weren’t as evident as they are now when market turmoil means liquidity is harder to come by.

For banks, knowing their own positions in real-time is just the half of it. Equally critical is being able to automatically and proactively act on that particular number, such as stopping a payment from being processed when it would affect mandated reserve buffers. That keeps a bank from being too far short. Similarly, with better information and modern processes to more tightly control their liquidity, many banks can avoid the damage they might otherwise experience if they continue settling transactions with other financial institutions that are themselves on the verge of failing.

Tony D. Smith

Strategic Consultant, ACI Worldwide wholesale banking products

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