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The Importance of Technology in Managing Your Institution's Liquidity

POV 05.25.2010

Liquidity management has evolved from a minor element of risk execution to its current status as one of the four risk management areas (liquidity, market, credit, and operational) the regulators, policymakers, and legislators identified as essential to our financial crisis recovery.  Likewise, the use of technology in managing risk has become increasingly crucial in this financial climate, along with the inclusion of the information technology (IT) department up front when instituting any liquidity management technology- a strategy that can no longer be an afterthought. 

Remember that liquidity reflects a financial institution’s ability to fund its obligations – a loan, margin call, large wire, fraud or any other funding requirement placed upon it. And liquidity risk reflects the threat stemming from the inability to market an investment that can’t be bought or sold quickly enough to minimize or prevent a loss. Quickly is one of the operative words here.

Advanced liquidity management systems provide solutions to meet an institution’s complex needs.  They assess an institution’s prospective funding needs and make sure funds are available at appropriate times. These software systems monitor and assess the institution’s current and future debt obligations and plans for any unexpected funding needs- ranging from a drop in the institution’s collateral value to economy-wide factors. As with so many other recommendations, a financial institution’s need for this particular software is driven by such factors as asset size and its portfolio complexity. A smaller community bank, for example, with an ordinary loan deposit portfolio, may not find as much value in this type of technology.

Pros of a Liquidity Management System
Many bankers believe liquidity management software is vastly superior to employing manual processes.  The latter requires extra staff, is apt to make mistakes, and restricts the treasury’s ability to concentrate on maximizing liquidity and other strategic responsibilities.

Further, much of the information or data the liquidity management process requires isn’t typically available in real time with a manual process because it exists across many systems. So, for instance, an institution can’t quickly identify the lowest cost of funds by relying on manual processes. Fortunately, these manual tasks can be automated using high-volume processing engines and software can be added easily to decrease the need to replace whole legacy systems- a costly venture.

Liquidity management technology can reduce liquidity risk, a major financial exposure in today’s environment.  It maximizes a financial institution’s return on collateral. It decreases the overhead costs for managing liquidity.  It helps deliver exceptional service by providing an institution with perceptive knowledge of customer behavior. And, of course, a central objective of such software is to ensure that the institution can address its daily liquidity obligations and withstand a period of liquidity stress, whether triggered from within the institution or by outside forces.

Integrating the Technology Staff from the Start
Today’s challenges are greater than they’ve been in the past: today you definitely depend on information delivered swiftly and accurately from the liquidity management system. Traditionally, data and systems management operations have provided such information to treasury, finance officials, and the executive suite. And as part of that same tradition, the IT staff has rarely been involved. 

This custom reflects the way institutions have acquired and used analytic software packages, beginning with applications for the common spreadsheet. When such software appeared, it offered a powerful way to handle data and conduct analysis outside of the institution’s core system.  Clever people began to use the spreadsheet for all sorts of things – accounting, financial management, inventory, you name it.  But it took place outside of the IT universe.

These clever people then figured out that since the analytic process had become integral to managing the bank, they could build software to accomplish the same thing, albeit faster, more consistently, and more accurately. They just needed the data from a file-download perspective. Since this software was self contained, someone in treasury could serve as the administrator, user, analyzer, and reporter. Again, IT was left out in the cold.

As a result, historically, IT departments have found it more difficult to use analytic tools intended for asset liability and risk management. Again, this reflected the fact that users of this software needed to tinker with the data to get the analysis they wanted- sometimes entering third-party information or fixing a bug in a provider’s latest release. IT staffs just haven’t been that involved with this particular software.

What has become increasingly clear is the path to resolving this anomaly from the start is to integrate the IT staff into the operational side when you first use liquidity management software.  Fostering a partnership between IT and the business side of the institution enables you to obtain needed reports more quickly, in a safe and secure fashion, with all of the proper controls in place.

If your institution is in the market for a liquidity management solution, you and your IT staff should be aware of several factors that could influence your choice. First, liquidity management solutions vary greatly in their capabilities. When selecting one, you should focus on identifying the system with the features and functions that best fit your institution’s needs.  Second, there are significant differences in the various systems which make it almost impossible to make cost comparisons.  That’s why it’s important to judge each system on its functionality.  You will discover, though, that regardless of the technology you choose, in today’s fragile, financial environment, the benefits will far outweigh the risks of inefficient liquidity management.