Likwidity Quarterly Q224-"Not a word about AI"

Requiem for TFF?

Stop all the clocks, cut off the telephone,

Prevent the dog from barking with a juicy bone,

Silence the pianos and with muffled drum

Bring out the coffin, let the mourners come.

Funeral Blues- WH Auden..

This month marks (Jun24) the demise of the controversial TFF (Term Funding Facility and only bankers will be mourning this.

It seems like a lifetime ago when in the height of Covid, the RBA (and other Central banks) concocted some of the most contentious and long reaching policies and actions. In Australia, the TFF (Term Funding Facility) gifted the banks (mostly the Big4) $188bn at almost zero rate and in turn they lent out at market related rates, creating super profits for banks, feeding the housing bubble etc. This month is the deadline for banks to repay these funds and some analysts have speculated of upcoming changes in market liquidity and possible interest rate pressures, with comments such as from Matt Wilson, at Jeffries, “the action is the switch from at-call transactions to term deposits as savers seek to rationally bank much higher yields.”. At a macro level, this potentially marks the official return to normality in market liquidity.

Bank diversification and How Many Banks do Commercial organization's need?

In May24, the almost unthinkable happened, Business Day columnist Ian Rogers ventured a view that a Big4 Australian bank was a wreck "...Westpac was a wreck and may always be a wreck". He goes further in suggesting that a foreign bank should take it over. [Note: It would seem that this article has since been removed]

Such a view must surely be controversial and must have caused many conversations across the spectrum including business and government. This comment underpins core risk management for corporates and must kick start internal assessment of concentration risk. Every organization MUST as a bare minimum adopt a multi-bank strategy and ensure that all eggs are never in one basket.

When one peruses the literature regarding optimal number of banks per organization, there does not appear to be too much empirical research to support or backup the anecdotal evidence that we piece together through our daily interactions with organizations.

That has left us curious as to what is the general practice in the market and by extension, what is the optimal scenario for each organization.

It is common sense in business for every business to ensuring security and continuity of supply chain and in numerous cases this often means not have concentration risk to a supplier where possible.

Many company treasury policies include a concentration risk section, and based on some high-level analysis, the trend seems to indicate approximately 30% exposure per counterparty. Ergo, approximately 3 banks per organization.

How do you fare and what do you think is the best outcome for your organization?

Take our 2-question poll and see what others are thinking and doing.

Growth in platforms

In building out Likwidity, we have often used the forex market as a form of proxy about how e-trading (electronification) in the cash markets will evolve. As most markets, there are differing combination of players whether bank-to-bank or customer-to-bank or broker-to-bank etc. After a slow start in the 2000's e-trading has consolidated itself as the predominant form of transacting accounting for around 60% of combined transaction volumes across segments.

Within that data it also shows that for dealer-to-customer, the RFQ is the dominant format at 95% of all trades.

The main driver of electronification has probably been the potential to reduce the cost of trading and improve market liquidity. One key advantage of ETPs is automating the processing and settlement of trades, so-called straight through processing. This reduces the need for human processing, lowering both the cost of trading and operational risks

Trends in technology

Yes, you must be sick of being told about aye eye, so we are avoiding the term today. (even though our next release will include it).

This paragraph is more about highlighting all the trends and aspects that finance teams have to remain abreast of (many are exciting but may not endure). Just a short note to reminisce:

Blockchain, Crypto, Cloud computing, Embedded finance, Open banking, Regtech, Cybersecurity, Process automation, Sustainable finance

What will the next one be.....