Intraday liquidity

On 21 November 1985 a software failure left the Bank of New York unable to pass on the US Treasury securities it was receiving for its customers. It kept paying for the securities that arrived, but could not deliver them on and collect the cash. By the end of the day the hole was so large that it borrowed $22.6 billion overnight from the Federal Reserve Bank of New York, a record at the time. Its problem was a computer, not its balance sheet. It had run out of money in the middle of a working day.

Everything so far in this module has counted cash at the end of each day: the ladder of L3.5.04: Cash flow ladders and maturity gaps, the 90-day stress test of L3.5.05: Liquidity stress tests and survival horizons, the buffer of L3.5.06: The liquidity buffer. Payments do not wait for the end of the day. A bank sends and receives thousands of them, each of which must be funded the moment it settles. The cash it needs for that is its intraday liquidityIntraday liquidity: money a bank can use during the business day to make its payments on time: its reserves, intraday credit from the central bank, and payments it receives..

How large payments settle

Large-value payments in most countries settle by real-time gross settlementReal-time gross settlement: each payment is settled on its own, in full and with finality, in central bank money, the moment it is processed, provided the payer has the money in its account. (RTGS). In the UK the system is CHAPSThe UK's high-value sterling payment system. Each payment settles individually in real time across the participants' accounts at the Bank of England., which settles each payment individually across the participants' accounts at the Bank of England. In 2024 it settled over £344 billion each working day, on average, for over 35 direct participants (Bank of England). CHAPS settles from 06:00 to 18:00, Monday to Friday; in February 2026 the Bank confirmed it will open at 01:30 from September 2027.

Gross settlement is safe: each payment is final, so the failure of one bank cannot unwind a whole batch of netted payments. The price is liquidity. A payment settles only if the sender has the money in its account at that moment. A bank's sources are its reserves at the central bank, intraday creditIntraday credit: an overdraft or repo from the central bank (or a correspondent bank) that must be repaid before the end of the day, usually secured on collateral. from the central bank against collateral, and the payments other banks send it. The Bank of England has long provided intraday liquidity to CHAPS banks against eligible collateral, free of charge. The Federal Reserve has, since March 2011, charged nothing for collateralised daylight overdrafts and a 50bp annual rate on uncollateralised ones.

Free intraday credit still uses collateral, and collateral pledged to the central bank for the day is collateral the bank cannot use for anything else. So every bank would rather pay out of what it receives. If every bank waits for the others, payments queue up that could all have settled: a gridlockGridlock: banks each wait for the others' payments before sending their own, so payments queue that could all have settled.. That is why CHAPS has throughput guidelines, requiring participants to settle set proportions of their payments by set times of day, and why regulators measure throughputThroughput: the share of a bank's outgoing payments, by value, settled by a given time of day..

RiskAtoms Bank's payment day

Follow the running total of received less sent: the net cumulative positionNet cumulative position: the running total, through the day, of payments received less payments sent over the settlement account.. Its lowest point is how much money the bank needed to have that day: the daily maximum intraday liquidity usageDaily maximum intraday liquidity usage: the largest negative net cumulative position of payments received less payments sent during the day.. On the median day (day 85) the position fell to −£1.39bn at 10:01, then recovered to end the day in surplus. On the worst day of the year (day 173) it fell to −£3.64bn and never came back above zero.

A year of days: the BCBS 248 tools

One day says little. In April 2013 the Basel Committee published Monitoring tools for intraday liquidity management (BCBS 248): seven tools, reported monthly, for monitoring rather than as a limit. Usage is reported as the three largest days in the period and the average. On the bank's year:

The distribution behind tool A(i) is the empirical distribution of M-D02: Histograms and empirical distributions. In bins of £500m:

The shape is skewed to the right: most days need £0.5bn to £2bn, a few need much more. F̂ at £2.5bn is 92.4%: 231 of the 250 days needed no more. The 95th percentile is £2.68bn, the 99th £3.11bn. Against £11.39bn available at the start of the day, the bank looks comfortable. Two things change that: stress, and the rest of the module.

Intraday stress

BCBS 248 asks banks to look at four intraday stress scenarios. Predict what each does to the bank's year before you reveal it.

Managing it

The Basel Committee's 2008 Principles for Sound Liquidity Risk Management and Supervision put it in one line (Principle 8): “A bank should actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions.” In practice a payments treasury forecasts the day's flows (asking large customers for theirs), watches the position in real time, keeps collateral at the central bank, settles time-critical payments first, and paces the rest within the throughput rules. Holding the bank's non-critical payments back by an hour cuts its average usage from £1.47bn to £0.83bn, but its throughput by noon falls from 55% to 45%: the saving is other banks' cost.

The last point is the one that ties this lesson to the rest of the module. The reserves and gilts that fund the day are the same £13.7bn buffer that the LCR counts and the stress test spends. If the bank keeps its 99th percentile day, £3.11bn, free for payments throughout the combined stress, survival falls from 47 days to 20. An intraday need is not covered by a 30-day, end-of-day ratio; it has to be added to it.

Number a day's payments $j = 1, \dots, m$ in the order they settle, with time $t_j$, amount received $r_j$ and amount sent $s_j$ (one of them zero). For each day $d$ of $n$:

For the bank, $n = 250$ and $k = \lceil 250 \times 0.99 \rceil = 248$: the 99th percentile is the third largest day, which is why the three largest days tell a supervisor about the tail. Throughput by hour $h$ is $\sum_{j: t_j < h} s_j \big/ \sum_j s_j$, averaged over the days. A stress scenario changes the payments (delays the $r_j$, or removes those from one counterparty) and the whole calculation is run again: usage is path-dependent, so it cannot be scaled from the normal year.

Put the bank's year through the BCBS 248 stresses, hold its own payments back, and raise the central bank's haircut. Watch the histogram shift and the 99th percentile move against the liquidity available at the start of the day.

Basel. Principle 8 of the 2008 Principles for Sound Liquidity Risk Management and Supervision asks banks to manage intraday liquidity under normal and stressed conditions, and lists the operational elements: measuring expected daily gross flows, monitoring positions against available resources, arranging intraday funding, mobilising collateral, managing the timing of outflows, and being ready for disruptions. BCBS 248 (April 2013) added the seven monitoring tools and the four stress scenarios, for internationally active banks, with monthly reporting from 1 January 2015. They are monitoring tools, not a ratio with a minimum.

UK. The PRA's supervisory statement SS24/15 says intraday liquidity risk exposures are material for firms and expects them to analyse the risk in normal and stressed conditions, including delayed incoming payments, credit lines withdrawn or secured, and large client defaults. Direct participants should be able to calculate their maximum net debit position in each system, and the PRA may expect HQLA held for intraday needs to be usable within the day. The detail of the UK liquidity framework, the ILAAP and Pillar 2, comes in M4.5: Liquidity and IRRBB regulation.

• RTGS systems such as CHAPS settle each payment in full when it is made, so a bank must fund every payment as it goes: reserves, intraday credit against collateral, or incoming payments.
• Daily maximum intraday liquidity usage is the lowest point of the running total of received less sent; a day can end in surplus and still need billions at mid-morning.
• Over 250 days the bank's usage averages £1.47bn, with a 99th percentile (the third largest day) of £3.11bn.
• BCBS 248 gives seven monitoring tools and four stresses (own, counterparty, customer bank, market-wide); delayed or missing incoming payments deepen the dip sharply.
• Intraday needs draw on the same buffer as the 30-day stress: reserving the 99th percentile cuts the combined stress survival from 47 to 20 days.

RTGS

Real-time gross settlement: each payment is settled on its own, in full and with finality, in central bank money, the moment it is processed, provided the payer has the money in its account.

CHAPS

The UK's high-value sterling payment system. Each payment settles individually in real time across the participants' accounts at the Bank of England.

Intraday liquidity

Intraday liquidity: money a bank can use during the business day to make its payments on time: its reserves, intraday credit from the central bank, and payments it receives.

Intraday credit

Intraday credit: an overdraft or repo from the central bank (or a correspondent bank) that must be repaid before the end of the day, usually secured on collateral.

Net cumulative position

Net cumulative position: the running total, through the day, of payments received less payments sent over the settlement account.

Daily maximum intraday liquidity usage

Daily maximum intraday liquidity usage: the largest negative net cumulative position of payments received less payments sent during the day.

Time-specific obligation

Time-specific obligation: a payment that must settle by a set time in the day, such as a pay-in to an FX settlement system or a margin payment to a CCP.

Throughput

Throughput: the share of a bank's outgoing payments, by value, settled by a given time of day.

Gridlock

Gridlock: banks each wait for the others' payments before sending their own, so payments queue that could all have settled.

Correspondent bank

Correspondent bank: a bank that makes and receives payments on behalf of other banks that are not direct members of the payment system.