Did you just understand or actually learn a lesson?

We spend a lot of time “understanding things”; reading this blog and other news on LinkedIn would come under that heading. We are acquiring knowledge, forming opinions on what we think good practice looks like, learning about the interesting theory and what in my now distant schooldays came under “pure maths”.? We don’t necessarily do anything with these freshly acquired insights.

“Learning a lesson” is the next step, applying the understanding, doing something with it. Back to maths in school: applied maths.

In previous posts I have shared my view on the consequences of all the bank failures from last year and the near miss with some of the UK Pension funds in late 2022. Regulators are going to be far more probing and are going to expect to see action taken quickly.

“See” is the operative word. Or more precisely “see in action”. A nice PowerPoint that says “we know x, y & z is important, we plan to do a, b, c and we we have told our staff they need to pay attention to p, q & r” will no longer enough. Your intentions are of limited value. All that PowerPoint just communicates you have understood, but not that you have done something about it in a way which improves your capabilities.

One factor in the Fed closing Signature Bank was liquidity related. The bank went overdrawn at the Fed. The Fed challenged them and asked: “When will you go back in the black?”,? to which their answer was apparently: “We don’t really know”. Game over. You need to have tools that support managing liquidity and to give you an easy view of whether there are more customer payments than usual, or if the value of outstanding receipts ay 14:00 is larger than usual.

If I was the regulator, I would ask the institutions: “Show me how you see right now what has happened versus what you expected to happen and how you know if that is normal or not.”

“Understanding normal” and seeing “Actual vs. Expected activity at-a-glance” - are for me the foundational ingredients for building great capabilities. If your people are doing a lot of manual work, then you don’t really have the right tools and your people can’t focus on assessing if today is running normally or not and almost certainly they won’t have the time to react to abnormal situations. Capabilities are a function of people, procedures and tools.? If you do that right you deliver: Compliance, Confidence and Customers.

Understanding things intraday is not even necessarily an extra cost.

Standard procedure in every FI that I know of is to do an end-of-day reconciliation of cash and securities accounts. For those of us of a certain age, the former is the MT950 rec; the statement from the bank vs. your internal ledger. Your reconciliations team do that and then you investigate breaks or differences.

Great, except that is after the event. Not one minute of that effort tomorrow helps you today; you are not getting full value for that work. Changing to do a real-time intraday reconciliation would be transformative; you have the one-time effort to do the project, but then day-to-day there is not net extra effort, nor would it be a reason to add additional headcount.

Moving to an intra-day cycle means your current cash management process will simply be more automated, freeing up time for your team to be more pro-active. Most likely, the real-time reconciliation will allow you to resolve breaks right now. You’ll still have to do the formality of an end-of-day reconciliation, but you’d expect to see fewer breaks.

As I write this, we move ever closer to the introduction of T+1 settlement in the US equity markets (Due in May 2024), with other markets intending to follow suit. There is a huge amount of noise about how difficult this is to prepare for, especially from the European markets. Of course, this will force some changes to “the way we have always done things”, and for sure we need new capabilities to emerge such as same day FX trading with atomic trading and settlement.?

Anecdote

Way back in the 90s I had some operational issues with a local Swiss bank which was incapable of checking its positions daily. You can read more about that one here. The short version is that one bank we were dealing with told us they could not help resolve an issue with a duplicate delivery until month-end, because that was the next time they would do a reconciliation. ?

In that case, even a humble end-of-day rec would have helped. Intra-day would have been even better.

Want to know how?banks?really work? Maybe you are in a?FinTech, a?bank?or a?consulting?firm. Maybe trying to do something new.?Understanding how to make things work properly is a good investment of your time.

The Bankers’ Plumber’s Handbook is about how investment banking works, how to do operations?properly and keep control.?

The book tries to make it easy for you and includes a collection of real-life, true stories from 30+ years of adventures in banking around the world. True tales of Goldman Sachs and collecting money from the mob, losing $2m of the partners’ money yet still keeping my job and keeping an eye on traders with evil intentions.

So, you might like the tool kit, you might like the stories, or you might only like the glossary, which one of my friends kindly said was worth the price of the book on its own.?Or you might like all of it.

Go ahead, get your copy! https://lnkd.in/eac5zWBD?

Thanks for reading. Perhaps you have a view? Please do let me know what you think of these notes. Feedback via the comments would be great.

I am a long-time and long-in-the-tooth hawk on matters liquidity. I work closely with a great team of people at Planixs where I am the Liquidity Futurologist. Planixs is in the business of building the right tool set for FS to manage liquidity in real time. I hope that together we can make liquidity sexy.?

If you would like to talk more about things liquidity, please just type: “Can we talk?” into the comments box.

Please feel free to get in contact: https://www.dhirubhai.net/in/bankersplumber/ and [email protected].

#Liquidity #LiquidityManagement #LiquidityMatters #FinancialServices?#RegulatoryConfidence #Planixs #Realiti