Cash & Liquidity ManagementCash ManagementPracticeWaking Up to the Intraday Realities of Nostro Cash Management

Waking Up to the Intraday Realities of Nostro Cash Management

A few decades ago something happened that changed the way major businesses were run. Rather than stockpiling to ensure continuity of supply, innovative firms decided simply to get greater knowledge of both customer demand and of where everything was at any point in time. As a result, cost and risk were both reduced but crucially they also stole a march on their rivals in a hugely competitive global market, gaining greater market share.

Except we’re not talking about banks.

This was automotive manufacturing. As the likes of Toyota and Nissan pioneered new techniques, competitors struggled to keep pace to the point where in the US and Europe Japanese car makers gained a huge market share.

But cash management within banks is very similar to stock in manufacturing – with one, critical, difference. The old approach (stockpiling) works, to a degree, with money left ready-at-hand in local accounts, but the outcomes and efficiency of the entire process could be hugely improved with new techniques and technology. Like those auto manufacturers in the 1980s, the banking world needs to use information in real time to solve the cash and nostro management problem, rather than excess stock to paper over it.

What is this critical difference? Unlike manufacturing, where excess stock is a dead business cost, a bank’s stock is cash that can – and should – be invested to earn its keep and generate additional stock, i.e. more money.

But what is the impact of today’s business practices on a banks’ ability to manage their cash effectively and at what cost? To understand more, gtnews undertook a survey of nostro cash managers and their results threw up some interesting intraday realities, as well as some eye-catching headline figures regarding cost and lost revenues.

Is it Still Really That Bad?

The short answer is: yes. Nostro cash management at the majority of financial institutions is still stuck in an endless loop of reactive assumptions. This glacial nature of the pace of change is evidenced by the findings of the gtnews survey. This revealed that eight out of 10 respondents require more accurate and quicker view of their balances.

While over half of these say they have ‘automation’ in some form, the majority doesn’t have anything close to full straight-through-processing (STP) for their nostro accounts. Given the attention paid to operational efficiency in banks now, these are staggering findings.

The current approach has a number of implications:


Firms are losing millions in lost and overpaid interest, using unnecessary overdraft facilities and incurring significant fees for doing so. Many of not even aware of these costs. In a manually-intensive process, more staff are required to manage the transactions.


Globally regulators are scrutinising financial institution operations, examining where the greatest risks occur. The UK Financial Services Authority (FSA), Monetary Authority of Singapore (MAS) and Hong Kong’s Monetary Authority (HKMA) are already advising or insisting that organisations automate their intraday processes.


Duplicate trades and missed payments create substantial risk, both operational and reputational. Further, organisations working hard to balance core currencies (USD, GBP, EUR) manually can on a busy day easily can miss large positions from a high volume of below-the-threshold flows in, for example, JPY or AUD.

Client service

Ensuring client payments are made with due regard to liquidity and providing competitive cut-off deadlines can ensure clients are retained or more clients acquired.

Revenue generation

Through automation the cash management centre can calculate interest opportunities, so that the nostro department can evolve into a profit centre instead of simply an operational cost.


As trade volumes rise, the nostro operation needs to scale. When staff numbers increase, so too does the number of point-to-point interactions, communication between geographic centres is harder and the risk of errors can breach acceptable limits.

Unsurprisingly, the gtnews survey shows that bankers have wised up and most now plan to increase automation, with cash management and liquidity management coming out as the top two areas for investment over the next 18 months. The numbers here suggest one of those sea change moments: is your organisation on the ball? Or not yet on the field?

Increased Attention by Those Holding the Big Stick

Many institutions are currently unable to measure how much money is at risk and are losing money through poor decisions based on old data. Further, they struggle to scale their operations and leave themselves open to unnecessary levels of risks. Rather than being acceptable as a business priority choice though, this situation that has been recognised by regulators globally as a risk to the financial system, so they are now acting accordingly.

Financial institutions who automate their nostro cash management function will demonstrate to regulators that they have the systems and controls they have in place to manage their cash and liquidity effectively. This is increasingly important – for example the UK’s introduction of individual liquidity assessments means regulators have discretion to set how much organisations must keep in costly cash buffers. Basel III, similarly, has focus on intraday liquidity and the US is paying attention also to this topic.

The US$50m Opportunity Cost Question

At the end of each business ‘day’, or more accurately three times a day for a global banking organisation, a bank needs to know how much cash it has left, if any. If it doesn’t, it won’t invest it and it will incur overdraft charges (or unused facility costs), may need extra staff and might even run out of cash.

How much does this cost? The survey findings revealed some astonishing figures. SmartStream has found, through in-depth studies, that banks can, typically, find around US$10m per annum through better investment of their nostro balances, or by avoiding interest/fees on shortfalls that require additional borrowing.

However, the survey revealed a far larger cost that previously imagined. Nearly a quarter (23%) of respondents they believe the opportunity cost is in excess of US$20m per year. And more than one in 10 think over US$50m.

Perhaps most worryingly, the survey also revealed how the lack of visibility has clouded the ability for senior managers to understand the cash positions of their bank. Forty per cent of directors and 50% of senior managers said they were “not sure” how much the lost opportunity cost might be. Going back to the automotive manufacturing market example, a senior director who does not know how much the firm’s inventory is costing the business and will not last long.

Where is the Cash? How Do We Know Whether it has Actually Moved?

Therefore, in the current environment it is vital to have visibility into cash positions to make the most use of internal liquidity. The starting point is complete visibility at the treasury level of all cash, with cash positions, funding requirements and investment transactions tracked in real (or near-real) time.

This can include fixed income, foreign exchange (FX), money market, derivatives, exchange traded derivatives (ETD) and over-the-counter (OTC), and other types. It can include all books and legal entities. It can include all countries and it should include all currencies.

Real-time data is absolutely critical to move away from the traditional reactive cash management in nostro accounts. A proactive, real-time approach helps to eliminate the costs of incurring unnecessary settlement and risk exposure in the market.

With real-time information in place, banks can then begin to accurately forecast cash flows. If the data used is too old the bank treasury will struggle when an event or transaction unfolds that adds pressure on bank liquidity.

However, this does require verification of transaction to happen on an intraday basis, getting confirmation that expected payments have indeed been settled during the day. Many respondents to the survey say they are doing this, which is impressive given the difficulties and costs of getting the MT900, MT910 and MT942 messages from correspondent banks – particularly in different time zones. Speaking to banks we have found that, on investigation, their coverage of intraday confirmations is much lower than they or their network management team think. But even if we accept the survey’s findings as a true picture, it is still a poor reflection on our industry that less than a quarter can verify the majority of their messages during settlement day.

When Liquidity Dries Up, Don’t Get Left Behind

The gtnews survey suggests that the Lehman Brothers lessons have been taken on board with regards to payment liquidity flows. The majority of respondents (78%) report that their institutions either fully or partly control their payment outflow by amount, currency, country, agent, beneficiary, rules or other factor.

Stress testing tests whether a fire extinguisher could put out a liquidity fire, but you still need to have bought the actual fire extinguisher – in this case a ‘stop payments’ button – to react and save the bank. And you need a smoke alarm to detect the stress in the first place.

Regardless of whether the current systems are precisely what is needed to accurately measure every detail of liquidity flows, there is a clear message emerging: if you are a bank that doesn’t have a handle on intraday cash flow and on payment liquidity, you need to remedy the situation and quickly. You’re already being left behind and when the next stress occurs the other banks will call in their liquidity first, leaving you out of pocket.

Why Intraday Matters Today

In order to get a true picture of their cash balances and liquidity risk and gain the confidence of clients and counterparties, as well as stay within the forthcoming guidelines of local and international regulators, cash management must be at the top of the bank’s to-do list.

So why act now?

The need is clear: minimise losses while also becoming more compliant. But with interest rates at an historic low it makes perfect sense to automate now – before the opportunity cost of daily investment goes through the roof. At the moment, excess funds invested correctly will earn a few extra basis points. Even overdrawn accounts might incur a manageable premium. However, both will change dramatically for the worse when interest rates rise and so become very visible, causing senior directors to start looking for the exposed culprits.

And what if your Excel expert leaves? Who will update all those clever macros that currently manage your cash?

After disregarding liquidity and credit risk every investment bank, institutional investment firm and hedge fund must address its reputational risk. Settling cash balances by hand (and Excel counts as ‘by hand’) when data screams across the internet is no way to run a business.

Automating process to reduce risk, improve reporting, boost cash forecasting and critically, proving to regulators that the systems and controls are in place to manage cash efficiently, intra-day, every day.

For further details on the gtnews 2011 Bank Treasury Survey, please click here.

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