Download our infographic which highlights the five key measures to ensure effective liquidity management for the future

    The short-term: the pursuit of daily liquidity

    In the initial phases of the Covid-19 pandemic, the primary priority of firms was to rapidly invoke business contingency plans, and ascertain these were effective at ensuring continuity and of safety of execution of operations. Institutions were also focused on ensuring that they had sufficient liquidity to continue to provide their own clients with much-needed support, while still meeting regulatory obligations. Banks, in particular, needed to be able to facilitate financial flows, and transmit liquidity effectively, swiftly and safely.

    Invoking business contingency plans

    In the first instance, business contingency plans (BCPs) were invoked, and firms sought to establish the effectiveness, resilience and security of BCP deployment – not just for their own institutions, but also for their correspondent banking partners and liquidity providers. In many cases, plans were found wanting. BCPs typically provide for operations to be conducted from an alternate, contingency site – rather than an almost complete home-working situation. Many had not anticipated a stress scenario as disruptive and extensive as Covid-19, which crosses borders and currencies, and impacts all market participants. Human contingency, rather than building or technology contingency, became the priority.

    Shoring up liquidity

    While there were significant drawdowns on credit lines in the initial stages of the pandemic1, liquidity supply was not an issue as banks’ capital and liquidity buffers had already been built-up to meet the required CET1 ratios. However, there was a collective and highly competitive drive in the interbank markets to shore up liquidity. Firms sought to secure as much instant access to cash as possible to either meet client commitments or to build their own contingency reserves. Daily liquidity became an important consideration as drawdowns on bank facilities increased.

    Institutional clients that had investments in stocks, shares and longer-dated asset classes shifted funds into instruments that offered immediate access, such as money market funds and ‘on demand’ accounts. In such an uncertain environment, firms were hesitant to tie up cash, preferring short-term options. Institutions had to find alternative “safe havens” for the liquidity that could offer a return, in an environment of near-zero to negative interest rates.

    With more liquidity flowing into cash accounts than usual, firms sought greater visibility on their cash positions, placing even greater emphasis on ease of access to their funds, and the reliability and robustness of their counterparties. Across all institutions, counterparty risk, already a key consideration under normal circumstances, was further amplified.

    Facilitating funds mobility

    Banks were called upon to continue to ensure the timely and secure transmission of funds throughout the financial ecosystem. From moving redeemed investments into cash accounts, to the disbursement of government stimulus packages, banks needed to ensure they had the operational capacity and reach to safely facilitate the flow of liquidity.

    Operations at some banks were disrupted; staff shortages at the branches of international banks created operational issues when processing head office payments directly in local or regional clearing schemes. There was a marked increase in the outsourcing of flow to banks like HSBC, whose BCP have the combination of direct clearing capability, full control of end-toend operations, and a reputation for consistent compliance to global standards throughout the network.

    Locking-in the lockdown lessons - measures for the medium term

    As institutional treasury and risk functions transition into a more stable environment, HSBC is collaborating with financial institution clients to share best practices and help to embed key lessons learnt in the initial response phase of Covid-19. This has formed the basis of a 5-point response framework:

    1. Find the weakest links:

    Conduct a Vulnerabilities Assessment to identify and assess areas of risk revealed by the early days of Covid-19. BCPs have just been through the ultimate stress test as the pandemic exposed critical areas of weakness in firms’ responses. The review should cover the entire firm, from front to back offices, across multiple scenarios, paying special attention to cybersecurity, and resulting in technology, process and behavioural recommendations on critical functions.

    2. Bolster the BCP:

    Update or enhance business and bank continuity plans with output from the vulnerabilities assessment, setting out clear policies and procedures, and creating a rigorous operational framework that reflects the firm’s capacity, capabilities and risk appetite. Areas to consider:

    a. Access, insights & infrastructure – ensure that teams have the right tools to conduct both strategic and day-today tasks. At the most basic level, this involves providing remote access to systems with the capability to receive instructions, initiate and authorise transactions digitally. The more this ability to transact and process remotely can be made ubiquitous throughout the organisation, rather than just limited to a small percentage of employees, the less disruption there will be to day-to-day operations. At HSBC, 95 per cent of the 52,000 GSC staff worldwide now work from home, with access to systems and tools that mirrors in-office capabilities.

    Equally, remote access to insights on transaction information and cash positions will facilitate quick and agile decision-making. At HSBC, for example, the Swift gpi tracker, embedded within HSBCnet, allows clients and internal teams to track the status of payments and confirming that the beneficiary has receipt for value in their account. This enables treasury and operations teams to accurately plan their liquidity availability for incoming funds, in addition to providing beneficiaries with the visibility that confirms funds are paid and available.

    HSBC’s Liquidity Management Portal (LMP) provides firms with a consolidated view of cash positions globally, with the ability to view all the way to individual account level. It also has self-management tools which means clients can make quicker funding and investment management decisions, and execute on them without having to engage with the bank. As it is online, it can be accessed remotely on all devices, allowing firms flexibility in continuity of business scenarios.

    Equally important is ensuring continued access to essential trading, clearing and settlement market infrastructure, either directly or through a partner, across the majority of the markets in which an institution needs to transact.

    b. Outsource partners and providers – Business continuity plans should extend to partners and providers across a firm’s value chain. It is critical that these entities – including unregulated fintech providers – have demonstrable capability to continue to meet service level agreements, and maintain the same rigorous standards of regulatory compliance in a crisis situation.

    This crisis presents a unique challenge in that its impact has been global, but it is being addressed with local measures. In preparing for other similarly complex crises, firms need to consider partners that have the scale to support across their network, coupled with the flexibility to meet specific market regulations and requirements. The ability to respond locally while leveraging global systems and processes are a key differentiator for HSBC, who can not only provide market advice and insight, but also has the capacity to quickly shore up operational support locally.

    3. Know your counterparty:

    Regulated institutions, due to the complexity of legacy architectures and the interdependence of the financial ecosystem, should take this unprecedented opportunity to build an extensive Correspondent and Counterparty Review Framework. In a crisis scenario, counterparty risk is heightened. Firms must consider both the extent of the full relationship, including partners’ appetite to commit to existing and new facilities, as well as their financial and operational robustness.

    4. Build your gameplan:

    Create or revise an Asset & Liability Countermeasure Playbook for each institutional business line that clearly lays out a response framework for a variety of stress scenarios. For institutions of all sizes, existing documented stress scenario models may not have been extensive enough to reflect such a specific stress which negatively impacts all client segments, in every industry vertical, coupled with near zero to negative interest rates in 5 of the G10 currencies and the certainty of a significant rise in non-performing loans. The playbook should also provision for the potential of increased regulatory oversight, testing and reporting, and establish data sources and resources to respond. Finally, Board approval and authorisation for revised policies and processes should be secured and documented. All these would enable rapid execution when the time comes.

    5. From insights to foresight:

    Given the fast-moving nature of the crisis, it became clear that institutions required instantaneous information from their correspondent banks to answer questions about liquidity. Solutions that provide detailed visibility over liquidity to enhance forecasting and decision-making are therefore critical. HSBC’s Liquidity Management Portal (LMP) and Cash Forecasting Solution are examples of readilyavailable tools that provide information on cash positions and the ability to drill down by currency, entity and geography.

    This move towards instantaneous information moves institutions into the world of application programming interfaces (APIs), which will enable them to access real-time information, rather than information that is pushed to them on a timed basis. Data sets that underpin HSBC’s LMP, for example, could be delivered via API into clients’ own systems for further analysis using their own tools.

    Beyond data from digital platforms, it is also critical that institutions remain keenly aware of market developments that would affect their liquidity strategies. Banks like HSBC provide clients with insights from a Global Research team with over 350 analysts on the ground around the world, offering market information and sharing local knowledge and insights – both vital for forward-planning in a dynamically changing crisis situation.

    Conduct a Vulnerabilities Assessment

    Remote working enablement scalability and security

    • Crisis Incident procedures
    • Funds transmission and critical settlement processes
    • Cybercrime and Fraud / Risk and Transaction Monitoring and Prevention
    • Client engagement- Feedback processes and analytics
    • Prioritised critical IT deployment

    Update / enhance business and bank continuity plans

    Credit commitment – reconfirm and right-size commitments to intraday / uncommitted facilities that ensure continuation of service to clients for payments, FX and securities settlement, trade finance lending.

    • Formal review of BCP of correspondent and settlement bank providers
    • Agree and document crisis scenarios and escalation paths
    • Secure call back procedures and prioritisation categories by value, currency, time criticality, counterparty, etc
    • Collaboration between correspondent, collateral, and settlement banking partners on forecasting of significant volume and value of payments, collateral and trade finance transactions for operational monitoring and reporting for internal and regulatory requirements

    Build a Correspondent / Counterparty Review Framework

    Correspondent banking and credit risk teams working collaboratively with institutional credit risk, capital markets and economic research teams to retrieve in real-time:

    • Institutional current and planned exposures
    • Current local market environment, especially government intervention actions, bank CDS and local FX margins
    • Identification of alternative / contingency providers
    • Revision of early warning signals globally and collaboratively

    Create or revise an Asset & Liability Counter-measure Playbook

    Conduct and document stress scenario models, idiosyncratic stress such as the pandemic. Explore impact in multiple interest-rate environments, for example, the current near-zero to negative interest rates in five of the G10 currencies.

    • Consider the potential of a significant rise in non-performing loans
    • Design agile, automated, and real-time asset and liability models that can be dynamically influenced by real-time events
    • Develop a consolidated, real-time view of cash flow and liquidity positions – including potential shortfalls - across all entities and subsidiaries to determine interim funding sourcing requirements
    • Anticipate potential of increased testing and /or reporting requirements and establish data sources and resources for rapid response

    Enhance automation & create actionable insights

    Daily and periodic forecasting adjustments to liquidity value balances per currency, per liability type, with insight as to specific duration and Basel / LCR categorisation

    • Asset performance-forecasting asset utilisations, rollover assumptions across classes; market pricing insights
    • Geographic, currency and client industry segment insights, trends, counterparty sensitivity
    • Estimates of non-performing loans, expected credit loss
    • Collaboration between business lines and group treasury for regulatory and statistical reporting, in addition to reporting required by national and supranational authorities
    • Create consolidated database (historical and under Covid stress), to enable benchmarking for further stress model enhancement. Such a database should be housed in a secure, service-orientated architecture and connected by internal and external APIs to provide real-time information

    This crisis has clearly heightened the need to digitise in order to increase agility of operations and gain instantaneous access to information.

    Building business resilience for the longer term

    BCP pushes digitisation up the agenda

    Digitisation was already high on the agenda for firms, and the pandemic has further strengthened the business case for digitisation programmes. With staff and clients displaced and unable to access offices, the inadequacies of paper-based, manual processes were exposed.

    A big theme going forward will therefore be the integration of digitisation with BCP, as firms consider prioritising digitisation projects on operational risk mitigation, and enhanced fraud and risk analytics.

    Operational risk management

    • Robust, real-time liquidity and funding dashboarding: Deploying AI capabilities to invoke complex stress scenario modelling, inclusive of counterparty, client and industry segment risks; FX volatility and zero floor interest rate assumptions; free cash flow impacts; non-performing loans etc
    • Digital self-service of corporate parameters with banks, suppliers, and market counterparties. Digital signatures, smart contracts will become the new standard
    • Acceleration of payments optimisation internally and with client base. Continued elimination of fax, cheques, and cash payment instruments, with increasing use of corporate and virtual cards
    • Account consolidation. Increase in the use of solutions such as HSBC’s NextGen Virtual Account Management (NgVAM) to streamline account structures
    • Smart routing. HSBCs global network supports clients’ liquidity and cash management needs consistently across an 80-country footprint and routes low-value transactions through our network as a book-to-book transfer into each market
    • Biometric identification and authorisation. HSBC’s clients can utilise biometric authentication for HSBCnet and mobile platforms to access global liquidity, cash, and trade solutions in 90 markets

    Enhanced fraud, and risk analytics

    As individuals and firms seek to be paid faster and with certainty of debit / credit, the requirement for real-time, predictive fraud and risk analytics has exponentially increased. This is being driven by:

    • Increased online transactions (particularly during the lockdown phase of the pandemic)
    • A growth in instant payments transactions that require real-time insight across the enterprise and to the originating institution, merchant, or payment service provider
    • Acceleration of B2B e-commerce models, increasing number of platform economy and technology companies becoming third-party payment providers or payment services providers and ‘banking/payments-as-a-service’ providers
    • HSBC’s fraud and risk analytics are supplemented by extensive AI capabilities that predict and identify behavioural anomalies across a centralised database of context, currency norms, geographic lens, etc that supplement historical insights
    • AI-based enhanced transaction monitoring can reduce false positives by pre-classifying detected alerts and generating commentary for the investigator as to why a false positive can be disregarded

    Digitisation for instant information and agility of operations

    This crisis has clearly heightened the need to digitise in order to increase agility of operations and gain instantaneous access to information. This will enable rapid responses in the short and medium-term, while also creating the potential for enhanced customer experiences in the longer-term.

    Ironically, the crisis that forced people to work apart may also serve as a catalyst for closer industry collaboration. From banks co-creating with fintech providers, to correspondent banking partners accelerating interconnectivity conversations, we will likely see a fresh impetus and acceleration of digitisation initiatives that may otherwise have taken several business cycles to implement.

    For example, initial onboarding of clients remains a manuallyintensive process, with much of the initial customer assessment still paper-based. HSBC has been an early adopter of the SWIFT KYC registry, which is designed to make Know Your Customer (KYC) processes more efficient and accelerate onboarding. This enhances the client experience in correspondent banking, while addressing regulatory and risk requirements.

    The need to keep trade – and thus liquidity - flowing will further drive the digitisation of trade finance. Traditionally a hugely complex, heavily manual process, trade finance has been ripe for digitisation for many years. Trade invoice documentation is increasingly digitised in multi-bank, industry-standard formats. Digital and Distributed Ledger Technology (DLT) based interfaces between corporates, institutions, and marketplaces such as the we.trade platform, of which HSBC is a participant, have been developed.

    Banks will need to collaborate for trade finance to be fully digitised, it is essential that the building blocks of risk and credit assessment are also digitised: with the advent of open banking, standardised API interfaces between banks, counterparties, corporates and marketplaces create the ability to automatically import multiple data sets to inform and support credit and risk approvals in close to real-time is reaching a critical turning point.

    Securities services is another prime area for digitisation, driven by pressures to drive down cost, innovate on solutions, and ensure operational resilience. From robotic process automation to increase efficiency to distributed ledger technology, big data and artificial intelligence for greater transparency and control, the use cases are wide and varied. HSBC’s Securities Services, for example, is implementing APIs that standardises data and information flows to custody clients.

    Looking back to move forward – support in a rapidly changing world

    As facilitators of the world’s financial flows, financial institutions will continue to play a critical role as conduits of liquidity that will keep economies moving. In today’s hyperconnected world, it is important that they look after their own fiscal and operational health, to avoid negative contagion sweeping through financial markets. In the long-term, there are three key areas to consider:

     

    Stay alert:

    Remain vigilant and aware of the changing market and client needs. Make building resilience into every process part of the new ‘business-as-usual’. When facing the unknown, agility and flexibility are firms’ best allies.

     

    Continue to digitise:

    The technological advances and digital solutions that had swiftly been implemented to keep liquidity flowing through the financial system will need to be built upon and enhanced.

     

    Pick the right partner:

    FI treasury teams must look at the operational structures and their banking relationships to not only improve their visibility over cash but also to answer an equally important question: ‘Am I with the right banking partner, one that can stand up in testing times?’

    The crisis reinforced that the ‘right’ banking partner is not merely the one with the highest credit rating, or the strongest balance sheet. These need to be in the context of a partner that maintains a robust operational infrastructure via investments in technology and people, a total relationship view of clients’ businesses, and has the appetite to stand by its clients during the most testing of times. It is the partner that can swiftly harness resources from across their network on their clients’ behalf, and deliver these services consistently without losing regional nuances.

    A top-class team, working efficiently with the right tools and banking partners would have complete oversight and understanding of the implications of external factors – whether these be a simple drop in interest rates, or as complex as the impact of a market lockdown. Over the long term, it is these digital tools and technologies, and the right partners, that will give firms the agility to adapt to the unexpected, and build the resilience to thrive into the future.

     

    For more information on how HSBC can help meet your needs please contact your local HSBC representative or visit gbm.hsbc.com

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