EXCLUSIVE: “Navigating a new world of liquidity management” – Peter Dehaan, SmartStream in ‘The Fintech Magazine’

After the GFC, we thought the world’s banking system was secure… SmartStream’s Peter Dehaan discusses what’s changed and how financial institutions should respond

“If you mismanage your capital, you’re going to die a slow death. If you mismanage your liquidity, it’s like dying of a heart attack,” says Peter Dehaan, global head of cash and liquidity management at technology solutions company SmartStream, and the man responsible for the firm’s cash and intraday liquidity pillar.

He’s reflecting on the spate of US banking collapses earlier this year, which sent shockwaves across the global financial system. The failures of Silicon Valley Bank (SVB) and Signature Bank plunged many companies into alarming credit and liquidity crises, bringing banks’ liquidity management sharply into question.

“That’s what treasurers are more focussed on now,” says Dehaan, “because that’s going to catch up with you faster than mismanaging your capital.”

RISING RATES AND CHATTER

As exposed spectacularly by the SVB implosion, it’s become even more important to appropriately manage liquidity in an age of rising interest rates and fevered social media use.

“Rising interest rates are playing a significant part,” acknowledges Dehaan. “When rates were zero, or next to nothing, there was a certain amount of discipline required to manage your money, but whether you were massively long or massively short didn’t really make much difference. Now the rates are above five per cent in the UK and the US, it becomes a more expensive hobby. So you need to be more careful about managing your funds.“We now also have the social media effect. You have uninformed people advising uninformed people what they should or shouldn’t do with their money.”

Dehaan believes that panic spread across social media only serves to accelerate bank runs. SVB’s will go down in history as a record-breaker, with $42billion withdrawn by depositors in just 10 hours.

“As a comparison, in 2008, Washington Mutual lost around $16billion across a nine-day period,” points out Dehaan.

The Federal Reserve has concluded that the bank’s failure was due to a ‘textbook case of mismanagement’, claiming its leadership neglected to manage basic interest rate and liquidity risk. It’s worth noting that the report also calls into question the Fed’s own regulatory failings, adding that ‘Federal Reserve supervisors failed to take forceful enough action’. It chooses not to point out that the same long-term government bonds that it criticises SVB for failing to hedge against when interest rates shot up and quickly eroded their value, are the same ones the Fed is majorly invested in.

Dehaan is clearly in no doubt that the US bank failures can be attributed to both the mismanagement of intraday liquidity and the regulatory framework in the US that allowed it to happen: many commentators have accused the Fed of hiking interest rates ‘until something breaks’.

“Treasurers and the regulators have to get much better at managing intraday liquidity,” says Dehaan, “and ask what are you looking at? Are you looking at projected or actual data? In general, there’s been little to no investment in this area over the last 10 to 15 years.

The time has now come for this to be addressed.

“The way I see it, you have three choices – the three Bs. Do you Bolster the systems that you have already – essentially, putting sticky tape on what’s there? Do you Build? If you’re a Tier 1 name, yes, you can probably afford to build. But if not, you have to Buy – so then you’re looking to partner with a trusted adviser who can help you to complement and boost the systems you have in place.”

“Treasurers and the regulators have to get much better at managing intraday liquidity. There’s been little to no investment in this area for 10 to 15 years”

Both SVB and Signature Bank were small in comparison to the nation’s largest banks, yet the shock they created, along with the Credit Suisse saga in Europe, has drained a large amount of confidence out of the incumbent financial system. And maybe that’s not misplaced.

“It goes back to antiquated and fractured infrastructure,” says Dehaan. “I was speaking to some treasury people recently, and someone told me they only had a 50 per cent confidence level in their positions at any point in the day. So that shouldn’t be filling y ou with confidence. It all boils down to the fact that the more information you can pull into the centre, the better armed you’re going to be.

“The more ledger information that you can consume, and the more debit and credit information you consume, the better. It enables you to match these off, in a real-time fashion, and move forward from there.”

A REGULATORY RETHINK

Looking to the future, banks may well now find regulators insisting on smarter liquidity management. Indeed, the wheels are already in motion. The ink is barely dry on Basel III, the latest international regulatory framework for banks that completed its long roll out in January 2023, and there are already plans to change the capital requirements linked to it in the US. In July this year, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency, unveiled plans that would require banks with at least $100billion in assets to boost the amount of capital set aside by an estimated 16 per cent. Under the proposals, midsize banks would also now have to include unrealised gains and losses from some securities in their capital ratios. And there will be stricter ways of calculating risk-based assets.

Martin Gruenberg, chairman of the FDIC had previously said that it was possible SVB might not have failed if these rules had been in place then. It’s also been reported that the Basel Committee on Banking Supervision is to review the entire Basel III package ‘in flight’.

In April, Bank of England Deputy Governor Sam Woods told lawmakers that bank liquidity rules may now be ‘an open question for international policy makers’.

The industry seems to agree. In a note to clients, PwC echoed the regulatory sentiment, predicting that banks with between $100billion and $250billion in total assets can soon expect changes around capital adequacy, total loss-absorbing capacity, liquidity requirements, resolution planning, and the impact of essential accounting for unrealised gains or losses in securities portfolios.

“European banking regulation is a lot tighter than what happens in the US,” says Dehaan. “Loose regulation fed into how the collapses played out. So they need to revise the regulation, and I expect that to be sooner rather than later. Where the thresholds are at, you can have $249billion and still be below. So I’m expecting that to become tiered soon.”

THE PURSUIT OF RETURNS

There’s also a growing awareness that real-time liquidity management affects the entire asset and liability management strategy. Real-time data allows firms to alter their investment strategy to ensure they have sufficient liquidity buffers by constantly rebalancing high and low-risk assets to match their liabilities. Consultancy group Finalyse is among those to highlight that the concept of asset and liability management focusses on the timing of cash flows because company managers must plan for the payment of liabilities.

Calling liquidity ‘the lifeline of financial institutions’, Finalyse points out that the pursuit of additional returns isn’t sustainable without ensuring a robust liquidity management strategy is in place.And this is where the SmartStream platform adds real value, giving institutions a real-time, rather than projected, assessment of their liquidity position.

“Boards and regulators are going to be increasingly asking ‘how do you manage your money?. Do you have a handle on it?’,” says Dehaan. “I was speaking to one institution recently, and they said their current state is managing their intraday liquidity on Excel, but they didn’t want this to be their future state.”

Nor perhaps should it be if they want to avoid the liquidity crunches that can so easily derail them.

This article was published in The Fintech Magazine Issue 29, Page 06-07