Intraday Liquidity Management: A Tale of Games Banks Play (2024)

FAQs

What is intraday liquidity for banks? ›

How banks manage their intraday liquidity depends on the availability and cost of intraday liquidity and LVPS design features. Banks coordinate and recycle their payments less when reserves are higher and the opportunity cost of holding reserves increases.

Daily maximum intraday liquidity usage is a measure of the bank's usage of an intraday credit extension. It is the ratio of the day's most significant net negative balance relative to the size of the committed or uncommitted credit line. The peak and average of this metric are monitored over some time.

Management of liquidity risk is critical to ensure that cash needs are continuously met. For instance, maintaining a portfolio of high-quality liquid assets, employing rigorous cash flow forecasting, and ensuring diversified funding sources are common tactics employed to mitigate liquidity risk.

At the root of a liquidity crisis are widespread maturity mismatching among banks and other businesses and a resulting lack of cash and other liquid assets when they are needed. Liquidity crises can be triggered by large, negative economic shocks or by normal cyclical changes in the economy.

What Is Intraday? Intraday means "within the day." In the financial world, the term is shorthand used to describe securities that trade on the markets during regular business hours. These securities include stocks and exchange-traded funds (ETFs).

The term Intraday means “within the day”. As the name itself suggests, Intraday Trading refers to the purchasing and selling of stocks within the same day. Also known as day trading, intraday trading aims to capitalize on short-term price movements, leveraging market volatility to generate profits.

There is no limit on the amount you choose to use for intraday trading. However, there are restrictions on margin trading that limit the amount of risk exposure a trader can take on in a day.

But note that buying stocks that are highly volatile can be counterproductive if the drop/rise is too steep. While there is no rule, most Intraday Traders prefer stocks that tend to move between 3-5% on either side.

With intraday trades, the timeframe is only one day. Whereas, with regular trading, you can hold the shares you have bought for as long as you want. When you feel that a certain stock price is going to decline you can take a short position on an intraday trade, however, there is no such option with regular trading.

Finance teams use liquidity management to strategically move funds where they are needed. For example, a CFO may review the balance sheet and see that funds currently tied up in one area can be moved to a critical short-term need to maintain day-to-day operations.

What is the risk of liquidity in a bank? ›

Liquidity is the risk to a bank's earnings and capital arising from its inability to timely meet obligations when they come due without incurring unacceptable losses. Bank management must ensure that sufficient funds are available at a reasonable cost to meet potential demands from both funds providers and borrowers.

Investment banks often have market making operations that are designed to generate revenue from providing liquidity in stocks or other markets. A market maker shows a quote (buy price and sale price) and earns a small difference between the two prices, also known as the bid-ask spread.

First, banks can obtain liquidity through the money market. They can do so either by borrowing additional funds from other market participants, or by reducing their own lending activity. Since both actions raise liquidity, we focus on net lending to the financial sector (loans minus deposits).

Liquid assets are cash and assets that can be converted to cash quickly if needed to meet financial obligations. Examples of liquid assets generally include central bank reserves and government bonds.

Intra-day Liquidity Facility or “ILF” means the facility to provide funds to a Participant by the Central Bank for the duration of a Business Day against securities provided as collateral by the Bank as described in the System Rules.

Liquidity is a measure of the cash and other assets banks have available to quickly pay bills and meet short-term business and financial obligations. Capital is a measure of the resources banks have to absorb losses.

A ratio of 1 is better than a ratio of less than 1, but it isn't ideal. Creditors and investors like to see higher liquidity ratios, such as 2 or 3. The higher the ratio is, the more likely a company is able to pay its short-term bills.

The three main types are central bank liquidity, market liquidity and funding liquidity.