13 November 2024

SSM: Sound practices for intraday liquidity risk management

The 2023 banking turmoil highlighted a number of lessons learnt in the context of liquidity risk management. Some of these lessons relate to the management of intraday liquidity risk – traditionally a less scrutinised area that could be viewed as financial plumbing.

This article takes a look at intraday liquidity risk in the light of a thematic review carried out by ECB Banking Supervision.

What is intraday liquidity risk?

Intraday liquidity risk arises in situations where a bank fails to manage its intraday liquidity effectively. It is the risk that a bank is unable to meet a payment obligation, including collateral, at the time expected, thereby affecting its own liquidity position and those of other parties. Traditional liquidity risk indicators do not capture intraday liquidity risk, as changes in a bank’s liquidity positions between the start and end of the day are typically limited. In other words, banks normally send and receive about the same amount of money on any given day, implying that there is no liquidity need. However, there are timing mismatches (within a currency and across currencies) between outgoing and incoming payments during the day that give rise to intraday liquidity needs – and therefore intraday liquidity risk.

While incoming payments are not under the bank’s control, it is expected to process outgoing payments in a timely manner, especially time-specific obligations, such as margin calls. In addition to using their liquidity reserves to meet such obligations, banks throttle (i.e. delay) payments to optimise the matching of intraday inflows and outflows and/or use counterparty credit lines to process the payments and settlements. Intraday liquidity risk is created through the processing of payments via real-time gross settlement systems and correspondent banking, as well as through securities settlement activities, foreign exchange settlement and activities related to central counterparties (e.g. clearing of derivatives).

Intraday liquidity was a relevant factor in the failure of Credit Suisse (CS) in 2023. This is highlighted in a recent report by the Basel Committee on Banking Supervision (BCBS), which mentions the increase in intraday requirements as a significant driver of CS’s liquidity needs: during the stress period, incoming payments were delayed due to changes in the payment behaviour of counterparties, but CS wanted to maintain normal outgoing payments to avoid negative signalling.

Other stress episodes in recent years have also highlighted the growing need for supervisors to assess banks’ intraday liquidity risk management, including the COVID-19 pandemic in 2020, the 2022 UK gilt market turmoil and the 2022 energy crisis, with fast-moving margins on cleared transactions. The risk is becoming even more relevant with emerging technological developments, including the growing importance of instant payments, faster settlement cycles, and algorithmic trading driven by artificial intelligence technology (e.g. by principal trading firms). These events and trends have prompted many supervisors and standard-setters globally to prioritise their efforts in the area of intraday liquidity....

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