The Importance of Technology in Managing an FI's Liquidity

Technology is becoming increasingly important to financial institutions to assist them with managing and maximizing their liquidity. Once a minor element of risk execution, liquidity management has evolved-especially as regulators, policymakers and lawmakers have dealt with the current financial crisis to concentrate on market, credit and operational risks.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. Technology enters the picture through advanced liquidity-management systems that provide solutions to meet an institution's complex needs. Among other things, they assess an institution's prospective funding needs and make sure funds are available at appropriate times. This software monitors and assesses the institution's current and future debt obligations and plans for any unexpected funding needs. These needs can range from those within the institution, such as a drop in its collateral value, to economy-wide factors. However, a financial institution's need for this particular software is driven by such factors as asset size and portfolio complexity. For example, a smaller, community bank with an ordinary loan deposit portfolio may not find as much value in this type of technology. Pros of a Liquidity-Management System Financial institutions find liquidity-management software vastly superior to employing manual processes. The latter requires extra staff, is error prone and restricts the treasury's ability to concentrate on maximizing liquidity and other strategic responsibilities.

Further, much of the information required for the liquidity-management process isn't typically available in real time as it exists across many systems. So 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 easily added software that decrease the need for costly replacements of legacy systems. Liquidity-management technology can reduce liquidity risk, a major factor in today's environment. It maximizes a financial institution's return on collateral; decreases the overhead costs for managing liquidity; helps deliver exceptional service by providing an institution with perceptive knowledge of customer behavior; and a central objective of such software involves ensuring with confidence that the institution can address its daily liquidity obligations and withstand a period of liquidity stress, whether triggered within the institution or by outside forces.

Challenges Exist: FIs Mitigate by Integrating Technology from the Start But a challenge emerges since liquidity management today requires information that is delivered swiftly and accurately. Traditionally, data-and-systems-management operations have provided such information to treasury and finance officials and the executive suite. The information technology staff hasn't been involved much.

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

These smart people then figured out since the analytic process had become integral to managing the bank, they could build software to accomplish the same thing 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 out in the cold.

As a result, IT departments find it more difficult to use analytic tools such as asset-liability and risk management. Again, this reflects that users of this software need to tinker with the data to get the required analysis they want. This may involve entering third-party information or fixing a bug in a provider's latest release. IT staffs just haven't been that involved with such software.

The answer involves integrating the IT staff into the operational side from the start when first using liquidity-management software. This partnership between IT and the business side enables the institution to obtain needed reports more quickly as well as in a safe and secure fashion with all of the proper controls taken.

Liquidity-management solutions vary greatly in their capabilities. When selecting one, a financial institution should focus on finding the system with the features and functions that best fit its needs. Because of the significant differences in the various systems, it will be hard to make cost comparisons. That's why it's important to judge each system on its functionality. The institution should find, however, that regardless of the technology it chooses, in today's fragile financial environment, its benefits will far outweigh the risks of inefficient liquidity management.

John Hurlock is director of integrated risk management, focusing on financial risk management, at Metavante.