By Vikas Srivastava, Chief Revenue Officer, Integral
Global markets are in a state of turbulence, fueled by escalating geopolitical uncertainty, inflationary pressures and supply chain upheaval. For banks and their clients, the unpredictable swings witnessed over recent days translate into heightened uncertainty. This must be addressed and priorities promptly re-evaluated.
Volatility puts immense pressure on banks of all sizes to sharpen pricing efficiency, elevate customer service, and – most critically – ramp up risk management. While the largest financial institutions, like the global systemically important banks (G-SIBs), are well-positioned to weather bouts of market turbulence, many smaller regional banks may have a chink in their armor. And it could prove costly as this chapter of relentless volatility continues to unfold.
A structural sticking point
A key structural difference between the largest banks and their smaller counterparts is that the smaller institutions still operate decentralized FX trading models, whereby different desks within a bank’s network handle their own risk and pricing operations.
The problem with this approach is the overall organization cannot get a detailed view of its trading positions, nor its trading patterns. When working in siloes, there is no central, companywide spot price for buying and selling each currency, limiting business cohesion considerably.
This magnifies inefficiencies, exposes unnecessary risks, and drives-up costs when the markets are turbulent. For smaller banks, the key to navigating volatility moving forward could lie in their ability to centralize pricing and risk management decision-making.
Abounding benefits
When markets are swinging, the optimal setup for a bank – regardless of its size – is a central system that pools all FX flow. Beyond enhancing risk and cost management, this helps generate sharper, more consistent pricing while optimizing spreads. In a nutshell, it’s about reducing flow leakage.
Banks that centralize FX trades can achieve much more competitive and consistent pricing. A centralized FX function offers a single view of the trades being carried out across a bank’s desks and regional entities. Rather than having to look beyond the organization, transactions can be handled between offices wherever possible, all through one central platform.
Critically, this model also allows risk netting across different branches, reducing exposure and hedging costs, and minimizing market movements that could negatively impact clients. Eliminating duplication of systems across subsidiaries and regions also streamlines processes, leading to lower overheads and greater agility in responding to market changes.
There is a client service advantage, too. Providing better pricing and stability understandably attracts more business from clients seeking reliable banking partners. In addition, banks with more efficient and centralized structures can scale operations and compete more effectively, serving their existing clients more efficiently and drawing in higher-tier customers.
While this approach was once the domain of the largest financial institutions, emerging technology is increasingly levelling the playing field – allowing the Davids to finally compete with the Goliaths of the banking world when it comes to risk.
Levelling the playing field
Historically, only the largest banks with substantial resources could afford sophisticated centralization models. But financial institutions operate in a far more advanced technological landscape – one that is unearthing compelling opportunities for the smallest players to enjoy centralization.
In particular, the advent of cloud computing and advanced trading technology have empowered these firms to implement centralization initiatives, and to do so without requiring an extensive investment in their infrastructure.
These innovations also mean centralization can be achieved in a seamless fashion. Rather than cobbling together a vast array of proprietary legacy systems across a range of branches and desks, modern solutions offer cost-effective access to scalable, interoperable technology.
With market uncertainty unlikely to subside anytime soon, the need for banks to implement strong and scalable solutions to withstand volatility is now more urgent a priority than ever. Institutions that move to centralize FX operations will secure stronger client relationships, improve profitability, and future-proof their operations.
Indeed, embracing centralization could be what defines the leaders of tomorrow’s banking industry. Those who fail to adapt risk falling behind in an increasingly competitive and unpredictable world.
