The Newest Banking Regulations: Leveraging Cash Management for Liquidity

The banking landscape in the US is shifting amid new regulations, causing ripples throughout the financial sector. A recent proposal put forward by a trio of United States bank regulators has caused this shift by suggesting a 16% increase in overall capital requirements.

This proposal is part of an ambitious effort to overhaul how banks measure the riskiness of their behavior, and, consequently, how much capital they must hold as a cushion. Mid-sized banks, those with assets nearing or exceeding $100 billion, are currently grappling with heightened concerns regarding these forthcoming regulations.

Stricter capital and liquidity requirements are on the horizon, compelling banks to strengthen their liquidity and asset liability management capabilities. We’ll explore these challenges and the proactive solutions available, including the crucial role of cash management services.

A Risk-Averse Approach: Building Cash Reserves

Recent developments have seen U.S. lenders accumulating substantial cash reserves in response to tightened regulations. Factors such as deposit outflows, a slowing economy, and looming liquidity regulations have led to this accumulation. Recent bank collapses have triggered massive deposit withdrawals, placing renewed focus on the financial health of financial institutions. Consequently, the banking sector has been grappling with ratings downgrades, highlighting the need for a robust risk management strategy.

Banks in the US had cash assets that stood at a staggering $3.26 trillion as of August 23, 2023, representing a 5.4% increase since the close of 2022. While these cash reserves are essential for meeting liabilities and offsetting risks, such as loan losses in a high-interest-rate environment, they also underscore the need for effective liquidity management.

Upcoming Regulations: The Challenge Ahead

Mid-sized banks are not only contending with the need to strengthen their liquidity positions but also the prospect of upcoming regulations. U.S. regulators have signaled their intent to impose stricter capital and liquidity requirements on banks with $100 billion or more in assets. Regulatory scrutiny has heightened since March, prompting banks to focus on key capabilities in liquidity and asset liability management.

According to Reuters, Peter Marshall, leader of EY's financial services liquidity advisory group, noted that "regulators are going to have a shorter fuse" for banks with gaps in managing liquidity and loans held on their books. The pressure is on for banks to ensure compliance and maintain their financial stability.

The Role of Cash Management Services

Amidst these challenges, the importance of having a trusted partner with a deep understanding of regulatory compliance cannot be overstated. This is where outsourced cash management services come into play.

Outsourced Cash Management Services

Loomis Cash Management Services offers a comprehensive solution for banks seeking to optimize their cash management strategies and navigate the regulatory landscape effectively. Thomas Strauser, VP of CMS at Loomis, sees the opportunity banks have to turn to a trusted partner.

“I see the outsourcing trend continuing to grow as economic uncertainties rise,” said Strauser. “Regulatory changes are easier to implement and control through a third party as we have a responsibility to ensure these changes are implemented at a wholesale level across our footprint and customer base.”

Real-time Tracking of Cash Flow and Balances

Beyond regulatory compliance, one key feature of Cash Management Services is real-time tracking of cash flow and balances. This capability provides banks with accurate, up-to-the-minute data, empowering them to make informed decisions regarding their liquidity positions. It ensures that banks can optimize their cash holdings and deploy funds where they are needed most, enhancing operational efficiency.

Optimizing Cash Deployment in Money Markets

Cash management platforms also enable banks to identify opportunities in money markets. In periods of high short-term rates, efficient cash deployment becomes even more critical. Cash management partners can assist banks in identifying and managing such investment opportunities, ensuring that funds are deployed strategically to generate returns.

Investing in Short-term Securities

During periods of high short-term interest rates, investing in short-term securities can be advantageous. CMS solutions facilitate the identification and management of these investment opportunities, allowing banks to capitalize on favorable market conditions.

Adapting to Change

Mid-size banks are facing a challenging environment and have a need for effective liquidity management. Proactive compliance and the right partners are essential for success.

“Every single day our CMS customers leverage our products and services to better manage down inventory balances, as well as have a tighter loop on the overall cash cycle,” said Strauser. “Loomis is able to process cash sooner and get excess balances to the Federal Reserve to improve on the cost of cash overall for the financial institution.”

Cash Management Services (CMS) from Loomis offer mid-sized banks the tools they need to navigate the shifting regulatory landscape while safeguarding their competitive edge. In times of uncertainty, a proactive approach and trusted partners like Loomis can make all the difference.