Intraday liquidity risk management key for banks

08 July 2014

Banks should increase the focus on how they manage their intraday liquidity. Not only could a critical review help improve risk management, it also could result in bottom-line savings, claims a new white paper from consultancy firm Double Effect.

Intraday liquidity are funds which can be accessed during the business day, enabling banks to make real-time payments. Similar to other financing trade-offs, the management of intraday liquidity requires banks to balance the risk of not (timely) having sufficient funds available versus the opportunity costs of surplus intraday liquidity. The approach to manage risks involved is defined as intraday liquidity risk.

Yet as a result of a changing banking landscape and higher impacts associated with misjudgements in the area of intraday liquidity, Double Effect warns that banks should seriously consider boosting their approach and tools around intraday liquidity risk management. An overview of the main reasons:

Double Effect - Money

Reputation risk/penalty fee

Up to recent, banks have not included interest fees on intraday liquidity. Yet parties in the market are in a rapid pace considering/implementing daylight overdraft fees if intraday negative balances are not timely replenished. In other words, a shortage of intraday liquidity could start to cost money. In addition, new regulation in the payments domain (e.g. EMIR) requires certain payments to be settled immediately. Failure to do so can lead to reputation damage.

Counteraction from other banks

Banks are increasingly monitoring intraday liquidity behaviour and using this data for risk management assessments. For instance, a later than usual payment could be a signal of ‘issues’, and could subsequently trigger a wave of mitigations. With intraday liquidity performance coming under increasing scrutiny combined with roll-on effects (i.e. counterparty-measures) the importance of a good track record is becoming more important.

New regulation

Also from a regulatory perspective there is a rising pressure for efficient intraday liquidity management. For instance, from 1 January 2015 banks will have to report on intraday liquidity management to the Basel Committee, while Dutch banks in addition have to comply with the intraday liquidity rules contained in the Dutch ILAAP regulation. When rules are not adhered to, such as insufficient buffers or inadequate reporting, fines can be imposed.


Other reasons include the increasing volatility in financial markets, the improved opportunities to boost intraday liquidity efficiency through data analysis and decreased levels of trust in the financial system.

Risk management perspective

“From a strategic viewpoint there is a clear case to a need and even an incentive to boost the way in which intraday liquidity is managed,” says Elmo Olieslagers, General Manager Double Effect Germany and co-author of the report ‘Intraday Liquidity Risk Management’. Yet contrary to the mainstream approach, which views IT and operational improvements as the basis for improvements in intraday liquidity, Olieslagers advocates for a different approach. “An IT perspective is in our view a derived approach. We recommend banks to take their operating model as the starting point and then manage the risks according to two key design principles: a three lines of defence approach and the application of the so-called COSO II Enterprise Risk Management Model*”.  

Three lines of defence approach

The three lines of defence is built on the principle that responsibilities are spread across three different lines of business. Olieslagers explains: “The business represents the first line. Here a line manager or risk support monitors risks that are taken. The second line is made up of central risk managers, compliance and the finance function, who typically report to the board and not the business unit head. The third line consists of the auditors, both internal and external, who are deemed responsible for bringing in an independent perspective.”

RIGHT COSO II Enterprise Risk Management Model

COSO II Enterprise Risk Management Model

To manage intraday liquidity risk the consultants advise the use of the COSO II Enterprise Risk Management Model. Olieslagers explains: “This risk management model is generally accepted by auditors, and is already common practice in many banks for the management of their operational risks.”

* The ‘COSO II Enterprise Risk Management Model’ was first introduced in 2004 and has grown to a global standard in the area of internal control and risk management. The model, which consist of 8 components, helps organisations design, monitor and evaluate their risk management practices.