FNA roundtable event summary (18 February 2020)

Our Banking Liquidity roundtable series continued last week with our second event, hosted by FNA’s President, Phillip Straley and Planixs’s Financial Services Director, Pete McIntyre.

We covered an interesting range of topics including:

  • The development of intraday liquidity systems in banks
  • International developments in intraday liquidity
  • The Canadian payments landscape and future trends
  • The optimisation of intraday liquidity using analytics and simulation

The discussion was driven by presentations and panel contributions from JPMorgan, Bank of Canada, Payments Canada, and FNA.


The regulation of intraday liquidity has evolved significantly since the 2007-8 financial crisis, from analytics standards to buffer requirements, financial institutions are expected to meet an increasing range of demands. Additionally, in recent years the market these systems are operating in has changed drastically. With a move towards faster payments, changes to traditional market infrastructure, and the impact of digitalisation upon customer expectations, financial institutions need to be predicting, not only catching up to, the impact of real-time actions in liquidity.

Discussion 1

The event began with a presentation on the development of intraday liquidity systems in banks. Our speaker highlighted the importance of using their system to not only ensure regulatory compliance, but to also create a programme that can help shape the business and the experience of its clients.

  • In a complex organization, our panelist described the process of managing intraday liquidity as a careful balancing act between sources and uses of liquidity.
  • In contrast to the 2007-8 crisis, which she described as ‘a crisis of liquidity’, the speaker believes that liquidity is now ample, and that banks and financial institutions have changed considerably compared to the period before the Global Financial Crisis.
  • However, in the present day, it is necessary for banks to maintain access to greater quantities of liquidity. Moreover, with payment system modernisation, and the adoption of real time payments, banks need to be prepared to move liquidity at any time of day or week.
  • The panelist then provided an overview of how their organization went about creating, initiating, and fine-tuning their intraday liquidity management systems. At first, the bank aimed to meet the necessary regulatory requirements. However, as the process continued and the system provided greater transparency into the mechanics of the business, the focus shifted to how the organization might take advantage of these insights to change how the business is run to benefit both the company and its clients.
  • The current intraday liquidity framework is split into: Measure, Monitor, Control, and Report.
  • The speaker described the necessity, due to the organization’s complexity, to define a ‘north star’ for the programme – a specific aim and a common language which can be used to guide all departments. This also meant building controls to reorientate the business to this aim when it goes off track. In order to improve collaboration, she emphasised the importance of effective measurement, monitoring, and reporting. Ensuring people in various roles care and understand the reports, such as what insights can be derived, helps to achieve intraday liquidity objectives and capitalise on new opportunities.
  • The panelist stressed the importance of investing in collating accurate data. Although time-consuming, sourcing the right data proved worthwhile and useful further down the line. Although some organizations can look to incorporate more sophisticated techniques to augment data, it pays to invest in ensuring that data quality is addressed up front. This means using both internal and external sources to create a consistent picture of the intraday market at any point in time. Organizations can then leverage this data further towards intraday forecasting and predictive analytics.
  • Queries from the audience included future aspirations for their system, and how the organization balances the demands of different departments. For the first topic, the panelist emphasised the risk of the unknown, and the importance of accurate predictions in order to solve not only crises of the past but potential crises of the future. With regards to collaboration, she stated that the process is a two-way street which requires both constant championing and wide-ranging knowledge of how different areas of the business function.

Discussion 2

Our second panelist addressed international developments in intraday liquidity. Using the recent findings of a liquidity efficiency research project she participated in, she provided insights on a number of large-value payment systems (LVPS) from a global perspective.

  • Presenting data from the first cross-system study, our speaker used daily payments data from Canada, Columbia, Denmark, the Euro System, Mexico, Switzerland, the UK, and the US to analyze which institutional characteristics and system design features have an impact, or no impact at all, on the liquidity usage and efficiency of various large-value payment systems.
  • Liquidity usage and efficiency varied significantly by country and also by time. Overall the researchers found that some large-value payment systems are more efficient than others, in the sense that more payments are settled for one dollar of liquidity due to a higher level of liquidity recycling.
  • The study demonstrated that overnight interest rates, liquidity reservations, and early settlement incentives have a positive impact on the liquidity efficiency of large-value payment systems, whereas reserve balances, priority settings, and uncollateralized intraday credit regimes were typically linked to a relatively higher use of liquidity. Additionally, the study indicated that FIFO bypass and multilateral offsetting which typically reduce delays and bottlenecks in payments do not impact system efficiency.
  • With regards to payment timing, the research found it was largely stable across and within countries. Overnight interest rates priority settings were found to lead to payments being settled later in the day. On the other hand, factors such as early payment incentives, reserve balances, FIFO bypass, and multilateral offsetting were found to incentivize payment system participants to send their payments earlier in the day.
  • Payment dispersion, an indicator of a lack of coordination, was shown to be positively correlated with the amount of reserves in a system, the availability of a FIFO bypass in payment queues, liquidity reservations, and the possibility to make payments using uncollateralized credit. The number of participants in a payment system, overnight interest rates, priority setting, early payment incentives, and multilateral offsetting seemed to have a significant negative impact on dispersion; i.e., stimulate payment coordination.
  • The study’s insights on the impact of the LVPS design concluded that the system design and features certainly influenced the use of liquidity and intraday liquidity efficiency. Liquidity saving features were significantly associated with earlier payments, but FIFO bypass functionalities are linked to reduced payment coordination, and have no effect on liquidity efficiency. Additionally, liquidity reservations are associated with higher payment discretion, but increased system efficiency.
  • Our speaker ended her presentation with some overall findings. This included that international use of intraday liquidity in large-value payment systems is significant at approximately 15% of daily payment value. She concluded that higher reserves (as a result of quantitative easing) tend to lead to earlier payment, but also reduced liquidity efficiency. According to this study’s results a LVPS design may result in greater inefficiency due to the behavioural changes of participants, and early payment incentives tend to lead to increased payment coordination and improved efficiency.
  • Questions and comments from the audience included how behaviour changes during times of stress and the conflict between liquidity efficiency and the demand for speed from users of the system. Our speaker responded that analyzing the impact of the current pandemic on liquidity efficiency is one of the next research projects of the international research group. It is true in her opinion that the process is always a trade-off between speed and liquidity cost, and that a more efficient system (in terms of liquidity usage) is not necessarily a better one, as some systems and/or participants may prioritise payment speed or other factors.

Discussion 3

Our third panellist focused on the Canadian payments landscape and potential future trends. She included insights from their annual report and discussed trends in the context of payments from both customers and businesses.

  • Volume and value trends pointed heavily to an overall shift in electronic payments with online transfers increasing by 563%, credit card payments up by 38% and debit card payments up by 22% in 2019. She predicted their percentage share of transactions to increase dramatically in the 2020 report due to the influence of Covid-19. The growth of online transfers in recent years is also likely due to the creation of new features designed to make the process easier, the push in-market, and the expanding number of banks accepting e-transfers. In a commercial context, businesses are now more comfortable both sending and receiving electronic payments.
  • In contrast, cash has decreased by 61%, and this consumer driven change has been occurring over the last 5 years, not only recently. With the increased popularity of contactless cards, the proportion of cash that used to be used for small transactions has now been taken by credit and debit payments. Our speaker highlighted that checks were declining in use, but still held a significant proportion, particularly in business transactions.
  • For the first time in 2019, the number of credit transactions outnumbered debit. She explained that this is likely driven by reward programmes and the fact that customers have access to a larger sum on their credit card. Due to the remote nature of recent consumer transactions, customers have also grown more comfortable leaving their payment information on ecommerce sites.
  • Data reports for 2020 have yet to be finalised, but the data demonstrates a significant decline in the use of ATMs and a large increase in the proportion of contactless payments.
  • Nevertheless, even with the notable decrease in the use of cash, our speaker predicts that Canadians will still wish to use it in the future. Despite a number of potential benefits of a cashless society, the concept of cash not being an alternative at all brings anxiety to businesses in particular and even some customers.
  • Questions from the audience addressed topics such as demographic variations and mobile payments. Our panelist stated that, as expected, older demographics were more likely to use cheque, especially for large transactions, but the increase in electronic payments came from all demographics as education, help, and availability have developed. With regards to mobile payments, she highlighted that they were more credit than debit card driven.

Discussion 4

Our panellists from FNA closed the webinar with a presentation on combining simulations and network analytics in order to optimise intraday liquidity systems.

  • It began with a historical perspective of the key developments, from the Bank of Finland’s first simulator to assess the impact on liquidity of Finland joining TARGET in 1999, to the Bank of England’s 2013 introduction of new liquidity saving mechanisms in CHAPS (designed with FNA Simulate). This overview finished with a look to the future, highlighting the optimisation of existing systems, the future of money, and FNA’s work on a CBDC simulator. Our speaker interestingly pointed out that despite the decrease in cash usage, 11% more cash was available last year.
  • The panelists highlighted how analytics-driven liquidity optimization could help financial institutions map and monitor complex financial networks, as well as to simulate operational and financial risks. This method drives in the range of a 25% reduction in intraday liquidity reserves and a 40-90% reduction in payment delays.
  • The approach is split into 3 pillars of activity: simulate, optimise and stress test.
    • Simulate: creation of a digital replica of the bank’s operating environment with the ability to tune operational usage to understand choke points and critical participants, thus achieving lower liquidity and reducing delays. Modernising Canada’s infrastructure in particular would include implementing an RTGS. Payments Canada, for example, uses simulations to provide participants with insights into the potential liquidity and delay implications of moving from the hybrid model to Lynx.
    • Optimise: works with a bank’s existing operational systems to inform payment systems to execute in such a way to minimise the Largest Net Negative Cumulative Position.
    • Stress simulations: used to model events such as bankruptcy or payment disruptions, and configure how to best minimise impact.
  • Questions from the audience included how CBDC simulators may differ from current simulation models, and what future situations they may prioritise predicting.

Roundtable discussion

  • The event concluded with a roundtable discussion in further depth. Debates included what impact Canadian payment modernisation may have on intraday liquidity management and customer behaviour, as well as what individuals may have done differently with recent research in mind. 

Many thanks to our fantastic speakers and all who attended the event! If you enjoyed the discussion, or missed out on this event, please follow us on LinkedIn for updates regarding our third Liquidity roundtable taking place later this year.

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