Pinpoint and account for where intraday liquidity is drawn from and what it is needed for.
The idea
Intraday liquidity is the funds a bank can reach during the business day to make payments and settle obligations in real time, as distinct from the overnight position reported at close. Sources are reserve balances at the central bank, intraday credit from the central bank against pledged collateral, balances and unused credit lines at correspondent banks, unencumbered liquid assets that can be monetised or pledged, and payments received from other participants as the day unfolds. Uses are the mirror image: payments into payment and settlement systems, customer and correspondent-banking payments, securities and foreign exchange settlement, margin and collateral calls, and intraday credit the bank itself extends. Gross inflows and outflows rarely arrive in step, so a bank whose day nets to zero can still need a large amount mid-day. Daily maximum usage is the deepest point of the cumulative net position, which is receipts minus payments. Exam point: size the need from the timing of flows, not from the end-of-day net.
Formulas
Daily maximum intraday liquidity usage
Daily maximum usage = −min(Cₜ)
- Cₜ
- the cumulative net position, receipts minus payments, at time t during the day
The deepest point of the cumulative position, not the end-of-day net or the largest single payment. A day that closes flat can still need a lot of liquidity.
A practice question
Which of the following is a source of intraday liquidity for a bank?
- A scheduled pay-in to a foreign exchange settlement system that must be made by a fixed timeWhy not: This is a time-specific obligation, which is a use of intraday liquidity, not a source.
- Intraday credit extended by the central bank against collateral the bank has pledged - correct
- A margin call issued by a central counterparty during the dayWhy not: A margin call is an outflow the bank must fund, so it is a use of liquidity rather than a source.
- Payments the bank sends on behalf of its correspondent banking clientsWhy not: Payments made for clients drain the bank's balance; they are a use of intraday liquidity.
Sources are reserves, central bank intraday credit against collateral, correspondent balances and lines, monetisable liquid assets and incoming payments. Settlement pay-ins, margin calls and client payments are demands on liquidity.
A harder one
A bank begins the day with reserve balances at the central bank of USD 400 million. It can draw intraday credit of USD 250 million against collateral it has already pledged to the central bank, and it holds unused intraday credit lines of USD 80 million at a correspondent bank. It also expects to receive payments of USD 120 million during the day. Its available intraday liquidity at the start of the day is closest to:
- USD 650 millionWhy not: Leaves out the unused correspondent credit lines, which are an available source.
- USD 850 millionWhy not: Adds the USD 120 million of expected receipts; these are intraday inflows that show up in the cumulative net position, not start-of-day resources.
- USD 730 million - correct
- USD 520 millionWhy not: Counts reserves plus expected receipts and ignores both the pledged-collateral credit and the correspondent lines.
Start-of-day available liquidity = reserves + central bank credit against pledged collateral + unused correspondent lines = 400 + 250 + 80 = 730. Expected receipts are flows during the day, not opening resources.
The hardest tier
A bank records the following hourly gross payments during the business day, in USD million (sent / received): 08-09: 120 / 40; 09-10: 200 / 90; 10-11: 150 / 100; 11-12: 260 / 110; 12-13: 90 / 150; 13-14: 140 / 230; 14-15: 100 / 260; 15-16: 60 / 140. The daily maximum intraday liquidity usage, defined as the largest negative value of the cumulative net position (receipts minus payments), is:
- USD 260 millionWhy not: Takes the largest single-hour gross outflow instead of the deepest point of the cumulative net position.
- USD 730 millionWhy not: Sums payments sent through 12:00 without offsetting the receipts that arrived over the same period.
- USD 390 million - correct
- USD 1,120 millionWhy not: Uses total gross payments sent over the day rather than the peak cumulative net deficit.
Cumulative net position by hour: -80, -190, -240, -390, -330, -240, -80, 0. The trough is -390 at 12:00, so peak usage is 390. The day closes flat, but the mid-day need is large.
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