Cognizant 20-20 Insights

The Impact of Basel III on Intraday

Liquidity Management
Conforming to recent Basel III regulations requires banks to overcome
the challenges associated with intraday liquidity management
and accelerate compliance with cloud-based or off-the-shelf solutions.
Executive Summary

the quality of the mandated capital was often not

sufficient to effectively absorb banks costs.

The financial crisis of 2008 prompted the Basel

Committee on Banking Supervision (BCBS) to
institute a new program for revising then-current
capital-adequacy guidelines for global banks. The
resulting framework, Basel III, was endorsed by
the G201 at its November 2010 summit in Seoul,
South Korea.

The capital adequacy rules under Basel I and

Basel II failed to take into account the risks posed
by banks exposures to transactions such as securitization, derivatives and repurchase agreements,
or consider the systemic risks associated with
the build-up of leverage in the financial system.

This paper summarizes the key changes mandated by Basel III regulations regarding intraday
liquidity management and the specific challenges
banks face. We also highlight the best practices of
institutions that have successfully tackled Basel
III regulatory edicts.

Among the key elements of Basel III are liquidity ratios, which help to ensure banks ability to
meet their short-term financial obligations on
time. A new Liquidity Coverage Ratio (LCR) and
Net Stable Funding Ratio (NSFR) will be gradually
introduced in 2015 and 2018, respectively.

In addition, we propose a strategic roadmap that

banks can use to accelerate compliance with
Basel IIIs requirements for liquidity management
and reporting.

LCR is the stock of high-quality liquid assets/net

cash outflows over a 30-day period. This ratio
must be larger than or equal to 100%. It aims
to ensure sufficient liquidity for 30 days under
a stress scenario. NSFR refers to the available
amount of stable funding/required amount of
stable funding. This ratio must be greater than
or equal to 100%. It aims to improve banks resilience in the event of liquidity shocks by promoting
longer-term funding of assets and other activities.

Strengthening Banks Resilience

Before the 2008 financial crisis, bank regulations
focused primarily on assuring capital adequacy.
However, the minimum capital levels mandated by
pre-crisis rules proved insufficient when it came
to protecting banks from the vulnerabilities and
actual losses they faced during the crisis. Also,

cognizant 20-20 insights | april 2015

Six Pillars of Intraday Liquidity Management Under Basel III

2
1
Measure Net
Funding Shortfall
Have the capacity to
measure expected
daily gross liquidity
inflows and outflows.
Anticipate intraday
timing and forecast the
range of potential net
funding shortfalls
during the day.

Monitor Intraday
Liquidity
Develop the capacity
to monitor intraday
liquidity positions
against expected
activities and
available resources
(balances, remaining
intraday credit
capacity, available
collateral).

4
Manage & Mobilize
Collateral

3
Sufficient
Intraday Funding
Acquire sufficient
funding to meet
intraday objectives.

Have the ability

to manage and
mobilize collateral as
necessary to obtain
intraday funds.

5
Manage Timing
of Outflow
Build a robust
capability to manage
the timing of liquidity
outflows in line with
intraday objectives.

6
Manage Disruptions
in Flows
Be prepared to deal
with unexpected
disruptions to
intraday liquidity
flows.

Figure 1

>> Available intraday liquidity at the start of the

The Impact on Intraday Liquidity

Management

business day can include:

Central bank reserves

Collateral pledged at the central

Intraday liquidity requirements are intended to

ensure that a bank manages its intraday liquidity
positions and risks to meet payment and settlement obligations under both normal and stressed
conditions.

bank

Collateral pledged per ancillary systems

Unencumbered liquid assets on a banks

Basel III regulations mandate that global banks

produce monthly reports to cover the following:

The impacted financial system

Ancillary systems
Accounts with correspondent banks
Currency
Cross-currency, if a bank can transfer

balance sheet

Total credit lines available secured,

committed

Balances with other banks

>> Intraday throughput
>>Total payments gross payments sent, gross
payments received

funds

between two currencies easily

>>Total value of time-specific obligations

A legal entity2 that the bank has exposure to

for a given corporate (e.g., Shell US, Shell UK)

Focus Areas for Banks

Large value payments systems comprising:

Meeting BCBS reporting rules requires that banks

focus on three areas (see Figure 2, page 3).

>> Daily

maximum intraday liquidity usage

the largest positive and negative net cumulative position.

cognizant 20-20 insights

Banks should also consider setting up mechanisms for monitoring differential product pricing
and liquidity. This can help them better manage
liquidity and provide an incentive for doing so

Meeting BCBS Requirements

Focus Area

Description

The capability to monitor daily payments per system, based on

parameters such as intraday throughputs, currency, balances with corMonitoring & Reporting
respondent banks, settlement accounts, nostro accounts, etc.
Reporting on key parameters as mandated by Basel III.
The ability to quickly mobilize funds in case of stress scenarios such as

Mobilizing Funds

own, counterparty, customer, market.

Behavioral analysis to forecast daily net payments outflow per system,

based on parameters such as intraday throughput, currency, balances
with correspondent banks, etc.

Forecasting
Figure 2

Differentiating Product Pricing and Liquidity Monitoring

Focus Area

Description

Have a transfer pricing policy in place for monitoring

liquidity within the banks lines of business (LoBs). In case

of shortfalls, this will ensure better controls over each LoB.

Transfer pricing

Identify the pain points related to liquidity management

and target them to improve efficiency.

Offer differential payment pricing

Offer pricing based on actual liquidity consumption per day.

Provide premium pricing to customers consuming high
liquidity.

Offer discounts to customers with below-average liquidity

consumption.

Motivate clients to change pattern

Offer discounts to customers who change their liquidity

consumption pattern, leading to net shortfall in a day, e.g.,

change direct debit cycle date, collection cycle date.

Figure 3

within the bank and among clients. (See Figure

3 above).

Key features

>> Consolidates

the banks transactional data

either in a central data store or in a cloudbased repository, using existing applications
as the data source.

IT Solutions for Automating and

Accelerating Compliance
Banks can adopt the following solutions to modify their liquidity-management IT landscape to
comply with Basel III requirements:

>> Basel III reports can be generated from the

Option 1: A greenfield, cloud-based solution

>> Also supports simulator logic to stress-test

As illustrated in Figure 4 on the next page, this

approach allows banks to automate and generate the Basel III reports listed above in Figure 3. It
also provides an opportunity to simulate the different stress scenarios for various liquidity risk
factors.

cognizant 20-20 insights

cloud-based presentation layer and shared

with regulatory bodies and external banks.

various scenarios surrounding intraday liquidity risks.

Pros

>> Banks can customize the solution.

A Cloud-Based Solution for Liquidity Management

Data Store Updated with Liquidity Data

Run Simulations and Create Basel III

Reports from Cloud

Payment Engine
Rules
Engine

Ledger
Engine

1
1
0

Payment
Gateway

Liquidity
Operational
Data

1
0
1 1 01
0

0
0

Customers

1 0 01 1 0 01
0 1 1 0 10
1
1
1
1

Send Reports to External Bodies

Basel III Reports

External Banks
& Regulators

Simulation

Figure 4

>>The bank is in control of the solution; there

is no need to share the business rules with a
third-party vendor.

>> It

is an expensive proposition, since it involves licensing costs and transaction-based

pricing.

Cons

>> IT

>>The

development and deployment does not

happen overnight slowing time to market.

>> Requirements-gathering will also take time,

again impacting speed to market.

Option 2: An off-the-shelf product

An off-the-shelf (COTS) solution enables banks
to generate Basel III reports listed earlier. (See
Figure 5, next page).

Key features

>> Centers on consolidating the banks transactional data using commercial, off the-shelf
software for liquidity management.

>> Basel III reports can be generated and shared

with regulatory bodies and external banks.

>> Also supports simulator logic to stress-test

various scenarios involving intraday liquidity
risks.

Pros

>> Faster time to market, given that the development time lines are shorter.

>> Very

little time/support required from the

business stakeholders to define the requirements.

cognizant 20-20 insights

Cons

banks business rules/operating principles are exposed to a third-party vendor.

Most global banks have already identified intraday liquidity challenges as a priority area, and
implemented product-based solutions to meet
the Basel III deadline.
For example, a large Scottish Bank, having
acknowledged intraday liquidity as its key
focus area following the 2008 meltdown, implemented Dovetails Intraday Cash and Liquidity
Dashboard. The system enables the bank to
capture, analyze and report on real-time and
historical data for intraday client balances and
transactions data, as well as RTGS and currency
correspondent balances and transactions. It also
provides a real-time, user-configurable dashboard
for pulling in cash-flow events from multiple systems across the bank to maintain a centralized,
normalized data set.
Another case in point: A large global bank based
in the U.S. adopted a COTS product, IBM Liquidity
Manager, with features for controlling payments
and nostro accounts, managing risk, and arriving at positions per currency. This helps the bank
monitor, forecast, schedule, reconcile, analyze
and provide intraday liquidity balances.

A Product-Based Solution for Liquidity Management

Product Creates Simulation and Basel III
Reports for Internal and External Customers

Data Store Updated with Liquidity Data

Payment Engine
Rules
Engine

1
0
Ledger 1 1 1
0
Engine
1 0 0 1
0

1
0

Payment
Gateway

Customers

1 0 01 1 0 01
0 1 1 0 10
1
1
1
1

Liquidity 1
Operational
Data

Basel III Reports

!
External Banks
& Regulators

Simulation

Figure 5

We believe that institutions that follow these

banks lead and take a proactive approach to
managing their intraday liquidity positions and
related risks will be in a prime position to meet
payment and settlement commitments as mandated by Basel III.

Footnotes
1

G20: An international forum of finance ministers and central bank governors from the twenty
most economically developed countries.

A legal entity is an association, corporation, partnership, proprietorship, trust or individual that

has legal standing in the eyes of the law. http://
www.businessdictionary.com/definition/legalentity.html#ixzz3VJ1byXJ9

About the Authors

Balbir Rathod is a Consulting Manager with Cognizant Business Consulting. He has 14 years of consulting
experience in payments and liquidity management, and has led several consulting engagements in these
areas. He can be reached at Balbir.Rathod@cognizant.com.
Vatsa Trayambkeshwar is a Consulting Manager with Cognizant Business Consulting. He has 11 years of
consulting experience in payments and cash management and credit risk (specializing in Basel regulations). He can be reached at Trayambkeshwar.Vatsa@cognizant.com.

About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the worlds leading companies build stronger businesses. Headquartered in
Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry
and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 75
development and delivery centers worldwide and approximately 211,500 employees as of December 31, 2014, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among
the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on
Twitter: Cognizant.

World Headquarters

European Headquarters

India Operations Headquarters

500 Frank W. Burr Blvd.

Teaneck, NJ 07666 USA
Phone: +1 201 801 0233
Fax: +1 201 801 0243
Toll Free: +1 888 937 3277
Email: inquiry@cognizant.com

1 Kingdom Street
Paddington Central
London W2 6BD
Phone: +44 (0) 20 7297 7600
Fax: +44 (0) 20 7121 0102
Email: infouk@cognizant.com

#5/535, Old Mahabalipuram Road

Okkiyam Pettai, Thoraipakkam
Chennai, 600 096 India
Phone: +91 (0) 44 4209 6000
Fax: +91 (0) 44 4209 6060
Email: inquiryindia@cognizant.com

Copyright 2015, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is
subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.
TL Codex 328