In the global financial crisis, banks were given liquidity and saved by governments. In 2020, banks are much stronger in terms of both liquidity and capital. During the COVID-19 crisis, businesses not banks are fighting to survive. A report from global management consulting firm Oliver Wyman makes the point that the role of banks now sits in the centre of governments’ efforts to keep the economy functioning. The government is looking to banks to give customers liquidity and credit.

Within banks, treasury is the lynchpin or flywheel. It knows the banks’ own liquidity uses and sources. As such, it also has the information from the banks’ customers of their uses and sources of liquidity - and most importantly how this is changing.

Until a few weeks ago, treasury was focused on efficient and low-cost liquidity management at minimal risk to the bank itself. Governments are now relying on banks to support their efforts to keep the economy and society functioning. Banks need to work closely with governments and central banks to speed up both monetary and fiscal policy implementation.

The Oliver Wyman report identifies three pillars of activity that bank treasury functions need to embrace in order to play this new role effectively:

1. Steady the ship: Get a tight grip on your liquidity and collateral

Before a bank treasury can help more widely, it has to ensure that it is able to forecast its liquidity situation under a few scenarios daily with the most recent information possible. The banks’ top IT people should be working for treasury. The report notes that models will need to be recalibrated and most likely expanded. The treasury will need control of collateral and assets - with a good, not overly conservative timeline to convert assets to liquidity. External messaging will be key to avoid outward signs of stress.

2. Link treasury and the business closely: Form an agile joint treasury/business squad

Treasury’s ability to forecast liquidity needs and sources accurately is built on model calibration from customer behaviour and business pipeline assumptions. During today’s crisis, not only have the behaviours changed, but the questions have changed from “what will they do” to “what do they need”. The treasurer will need to know what the bank can offer and what is needed to offer more. The report makes the case that this can only be done by working closely with the customer-facing businesses, and recommends that bank treasuries consider convening a “Joint Crisis Management Team”.

3. Support economic stability: Interface pro-actively with the government, the central bank, and regulators

With governments announcing loan payment holidays, wage guarantees and central banks loosening their requirements of assets needed to get liquidity, many assumptions are being made by policy makers about what will work well and quickly. The data being used for policy making is aggregate, macro economic data. The Oliver Wyman report suggests that pro-actively engaging with policy makers using bank data and information will benefit all parties. At the same time, bank regulators have recognised the key role expected of banks and have reduced the capital requirements, and cancelled annual stress tests. Keeping the regulators updated, not waiting for engagement, will be important, the report concludes.