With liquidity shortfalls playing such a fundamental role in the financial crisis of 2008, it’s no surprise that regulations such as Basel III and Dodd-Frank are pushing financial institutions to raise their capital and liquidity ratios.

Banks are trying to understand how these new regulations will impact their business. And there’s one overarching theme: the increasing importance of liquidity pricing.

Liquidity has always had a value attached to it. But with new regulations it is becoming more costly than ever. Now liquidity pricing must be built into every part of a company’s business plan including governance, strategy and capital or liquidity management. This will result in some businesses actually withdrawing services from clients that use high-value cash flows and lots of liquidity. Clearly, this loss of business is a bad thing.

Liquidity-focused world

So how will financial institutions keep hold of those tricky, liquidity-intensive clients? How will they make the most of the new liquidity-focussed world?

The real challenge for banks is to put in place mechanisms to track, analyse and allocate charges for client liquidity usage. Existing client activity controls are limited to intra-day account overdraft limits – uncommitted credit lines – used to smooth daily payments operations.  If banks can’t see what they’re doing, then they’re flying blind and their only option rests with extremely conservative risk policies.

Banks should consider centralising their group’s cash management and combining liquidity costs with other service costs. This will allow banks to get a better view of their positions, and tread closer to the regulatory lines without risking fines. Most importantly, with active monitoring and controls they can retain clients who need more liquidity.

Banks should also think of rationalising the way they manage their own cash, and cutting back the number of nostro accounts they hold. Currently, many banks have too many of these accounts and are also using nostros for intra-group payments – which use up precious liquidity.

Ultimately, banks that streamline their processes – both in their back-end and in their cash management – will have a competitive advantage, and offer services with a higher margin to more clients.