Awash in liquidity, banks seek tech solution

April 6, 2018


by Penny Crosman published April 06 2017, 3:23pm EDT

Too much cash. It sounds like a good problem to have.

But for banks, it can be costly to have too much cash sitting around doing nothing. Having too little liquidity can run them afoul with regulators, of course. It’s part of a chief financial officer and treasury department’s job to manage this to a reasonable level.

A technology solution to the liquidity problem is being created by CIBC, Commerzbank, Credit Suisse, ING and UBS, along with the blockchain consortium R3 and the liquidity management software company HQLAᵡ. They are building a distributed ledger specifically for banks to trade highly liquid securities with one another and thus be better able to manage their liquidity ratios.

It’s early days and the bankers’ ambitions are modest so far.

“My hope for this project is that it helps us frame a discussion with custodians, partner banks and regulators that leads us down a pathway to commercialization and to a real platform that allows for a marketplace for real-time transacting,” said Emmanuel Aidoo, head of blockchain and distributed ledger technology strategy at Credit Suisse.

The liquidity problem

In a recent report, the Bank of International Settlements found that financial institutions hold more highly liquid assets to meet short-term obligations than they need to.

“As a result of Basel III regulation, particularly as it relates to the liquidity coverage ratio, banks have done a good job of sourcing liquidity and in many cases now, banks are in a position where they have excess capacity of liquidity,” said Guido Stroemer, CEO of HQLAᵡ.

This puts an onus on the CFO and treasury department of each bank to manage their liquidity ratios to a target, he said.

Liquidity is typically managed through the borrowing and lending of cash and securities.

Stroemer was working in UBS’s treasury department when he perceived a need for a standardized and transparent marketplace for banks and other market participants to transfer liquidity.

“The underlying securities settlement system that we have in place across the globe is quite fragmented, and it’s difficult in this day and age to move securities from one international central securities depository to another,” he said.

Stroemer said he believes that rather than physically transfer cash and securities among one another, banks would be better off keeping all the securities in a secure place, and transferring legal title to them amongst each other.

In the plan for the new ledger, a trusted third party, such as a central securities depository, will use R3’s Corda platform to issue and track receipts (formally called digital collateral receipts) for the securities banks want to trade. The ledger will not store the cash or securities — the trusted third parties will take care of that.