Amid the bank crisis and rising interest rates, more frequent and proactive visibility into liquidity levels has become a top priority.

In the news

It was a perfect storm: The combination of a protracted low interest regime, unique portfolio and funding strategy, imprudent risk management practices, and depositors’ panic—all of these led to the liquidity crisis for Silicon Valley Bank (SVB).

There’s a nervousness in the industry that a similar fate could befall any bank. But this crisis serves as a reminder of how sound liquidity management ensures that banks can meet their obligations to depositors, creditors and other stakeholders. It not only plays a pivotal role in bank resiliency but also fosters stability in the financial markets.

Measuring and monitoring key metrics such as liquidity coverage ratio (LCR), net stable funding ratio (NSFR), cash reserve ratio (CRR), asset/deposit quality, etc. is critical. However, the reporting requirements vary from daily to monthly, depending on the regulatory obligations of a bank.

To curtail future systemic impact, many are seeking more stringent requirements. The European Central Bank is reported to be reassessing its treatment of the risk, and Canadian regulators plan daily check-ins with banks.

In the US, there’s increasing pressure to step up regulation on midsize banks with $100 billion to $250 billion in assets, requiring them to improve their liquidity management to protect against potential losses and maintain enough access to cash to weather through the crisis situations.

As highlighted in our previous blog, while it is imperative to resolve onboarding challenges for commercial clients, it is equally important to focus on retaining and perhaps attracting back deposits that ”fled” during Q1 2023.

The Cognizant take

While banks have historically focused on meeting minimum regulatory obligations, we expect to see a shift toward more prudent management of exposure risk operations.

“Looking ahead, we can expect heightened regulatory scrutiny and more stringent liquidity risk management and reporting requirements,” says Sanghosh Bhalla, Senior Banking Consulting Principal in Cognizant’s Banking and Financial Services division.

Additionally, with instant payments gaining wide adoption, real-time visibility into liquidity positions becomes even more crucial. “It’s about monitoring and reporting over hours and days, rather than weeks and months,” he says.

Banks need to begin assessing their current practices, and the first step would be to evaluate its suitability for their lines of business and product scope, says Bhalla. “Confidence in the accuracy of your data is critical. Are the metrics measuring the true risk? Are they timely, based on the right data, and actionable?” he says.

Banks should undertake a comprehensive effort in maximizing automation and developing enhanced data and technical solutions that provide ongoing visibility into the detailed view of their liquidity positions and the ability to quickly take corrective actions under a range of different stress scenarios, he continues.

“A strong risk culture, with clear roles and responsibilities, is paramount,” Bhalla says. “Senior leadership and board members need to take a proactive approach to risk management, ensuring that the right policies, procedures and controls are in place, and that they are regularly reviewed and updated.”