Fleming on Fleming
Back In 1961 J. Marcus Fleming (no relation to us!) introduced the term Conditional Liquidity. This had the caveat that the actual use of conditional liquidity requires unconditional liquidity. “An expanding world economy will most likely require increases in both these types of liquidity in an appropriate mixture,” said the IMF in their annual report of 1966.
Fast forward to August 2007, when the ECB doled out swift liquidity support to aid the gummed-up money markets.
By September, Northern Rock was cut off from market funding and there was the first run on a bank in Great Britain since the Victorian Age. A year later, Lehman Bros' huge losses in the third quarter required filing for bankruptcy, whilst Merrill Lynch required a rescue takeover, and AIG were propped up by the Federal Reserve. Between this time and September 2009, more than 150 banks were closed by the Federal Deposit Insurance Corporation.
All this is history of course. We know that events affected liquidity, and we know that regulations have been hypothesized to decrease liquidity risk: heavily traded OTC derivatives can be cleared by CCPs and market transparency can aid buy-side. But there is no consensus on what the problems are, let alone what to do about them. Has ECB intervention stimulated issues, are there universal finance issues, or are issues simply systemic?
The whipping boys are said to be those heedless hotspurs who allowed Euro-denominated money market funds to be exposed to the US subprime mortgage market. But this seems more like a story told after the fact, and what constructive lessons have we really learned? On the causal side we have a neat scapegoat, but on the solution side there are so many gaps in understanding of regulation that we can't even begin to know what to debate.
What about unregulated shadow banking? Should we be alarmed by blockchain movements, or is Russia's national CryptoRubble an indication that Putin knows where cryptocurrencies should be – within arm's reach. On the other hand Putin said only in October that cryptocurrencies posed significant risks. Here we have an illustration of the current financial predicament. Two arms held aloft in the air, the left arm saying “This is good”, while the right arm says “Don't do that”. Putin constantly seems a few steps ahead, while in the United States Dodd-Frank is still providing headaches. As per the axiom, “as above, so below”, banking institutions find themselves in the position of wondering what is good and bad: how liquid to be? Conditional or unconditional? How conditional or unconditional?
Prophets of Profits
We must make efficient funding decisions, stress testing for a variety of angles, identifying periods of strain and intuiting when to be unconventional and when to be conventional. As far as the conventional side goes, deep knowledge of BASEL III is a given. Understanding interactivity and where things will evolve to next is imperative. How should we tackle multiple scenario preparation for the stress situation and post-stress agenda? How do we adequately price liquidity in the digital age?
At Fleming's 12th Annual Liquidity Conference, 15-17 November in Vienna, 20+ speakers, all Heads and Chiefs within Liquidity and Asset Liability Management for large financial institutions will be gathering together to assess the current situation and optimize processes. A special round table discussion will look at the complex issue of interest rate management combined with liquidity management. Make sure you get your processes in perfect shape for 2018.
Find out more about liquidity and balance sheet management at Liquidity and Balance Sheet Management Forum:
The Need for International Reserves and Credit Facilities, J.A.H. de Beaufort Wijnholds 1977
Europe's Unfinished Currency: The Political Economics of the Euro, Thomas Mayer, 2012