Banks’ international liquidity management in the future: What role can financial market infrastructures play?

Abstract

Managing international liquidity and collateral is a challenge for banks, as they need to adapt to ever changing circumstances. These circumstances are now in a state of flux because of the financial crisis. Financial market behaviour has changed, the importance of high quality collateral has increased, new liquidity standards have been proposed and central counterparties will assume a greater role in the clearing of over-the-counter derivatives. There is no doubt that these trends will have a profound impact on banks’ liquidity and collateral management. This paper examines these trends and comments on the role that financial market infrastructures and central banks’ arrangements can play in this context. If banks have the possibility during a crisis to transfer securities or cash promptly from one country to another, they can possibly solve an imminent local liquidity problem by using the excess cash or securities that they have elsewhere. Such solutions seem more necessary now than they were in the past, because current trends signal a greater need for collateral (so that banks can use their high quality assets more efficiently). Moreover, new fast communication technology requires that banks solve local liquidity issues before the word spreads.