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LEARN MOREThe first quarter of 2023 was daunting for fund managers as the banking crisis unfolded. When the Federal Reserve raised interest rates in response to high inflation, it caused the collapse of three large banks and turmoil throughout the banking industry. Typically, bank failures have a domino effect on the financial system, leading to a liquidity crunch that can adversely affect other financial firms as well.
The collapse of Silicon Valley Bank, however, was symptomatic of a much bigger problem: excessive risk-taking by financial institutions. In this blog, we will explore the challenges buy-side firms face as a result of the banking crisis and provide insights on how to address these challenges with efficient treasury management and cash management.
Implications of Liquidity Risk for Buy-Side Firms
Buy-side firms are not subject to the same level of regulatory oversight and transparency as banks, which means they are more vulnerable to risks. For this reason, it is essential for asset managers to understand the risks associated with a banking crisis and implement effective risk management strategies.
One of the most common risks funds face during a banking crisis is liquidity risk. Liquidity risk is associated with a fund’s ability to meet its financial obligations. In buy-side firms, liquidity risk can arise for many reasons, such as a sudden increase in redemption requests, unexpected market movements, or counterparty defaults. A lack of sufficient liquidity may impair the fund’s ability to finance operations, make investments, or meet financial obligations on time.
Challenges in Liquidity Risk Management
Specifically, funds can encounter four major liquidity management challenges in a banking crisis. They are:
How IVP can help
The IVP Treasury Management platform can help fund managers mitigate the four major liquidity management risks associated with a banking crisis as well as prepare for similar scenarios in the future. Overall, this platform enables buy-side firms to:
Effective liquidity risk management is crucial for buy-side firms, but especially during a banking crisis. The failure of banks can lead to a severe shortage of liquidity in financial markets, which in turn makes it difficult for buy-side firms to meet existing obligations. By implementing a comprehensive treasury management solution, asset managers can ensure access to necessary cash on hand while minimizing exposure to liquidity risk.
Learn more about the IVP Treasury Management platform or contact us at sales@ivp.in to schedule a live or online demo.
An active treasury management solution that tracks, controls, and optimizes collateral and margin management with a unique combination of best-in-class analytics and data tools.
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