Liquidity buffer
Liquidity buffer means a reserve of cash or highly liquid assets held above expected needs. It lets a firm keep paying when flows turn out worse than forecast.
How it works
Bank supervision provides the reference model. European supervisors described the buffer as excess liquidity available outright for stress situations. Its size relates to a survival period, the time a firm can operate without raising new funds. The Basel liquidity coverage ratio asks banks to hold high-quality liquid assets covering 30 days of stressed outflows.
Payment companies are not banks, but the logic carries over. Customer inflows can lag payouts, and partners may need top-ups at short notice. Intermex cites the timing gap between agent funding and beneficiary payout as a liquidity risk. A buffer absorbs that gap without emergency borrowing.
A buffer only helps if it is usable. Funds that are pledged, trapped by cut-offs or held in the wrong currency do not count. Buffers are also meant to be drawn in stress. A Federal Reserve governor noted that banks can be reluctant to let liquidity ratios fall below the minimum.
Example
Illustrative example: A firm's busiest corridor pays out $1,000,000 on a normal day and $1,600,000 on a peak day. Treasury holds a buffer equal to three peak-day excesses: 3 × ($1,600,000 - $1,000,000) = $1,800,000. It keeps the buffer in same-day accessible deposits in the corridor currency.
Frequently asked questions
How is a liquidity buffer different from prefunding?
Prefunding covers expected payouts in a corridor. The buffer covers the unexpected, such as volume spikes, delayed inflows or a failed top-up. Some firms hold part of the buffer in the corridor and part centrally.
Can customer funds form part of our buffer?
Generally no. UK rules require relevant funds to be kept apart from the firm's own funds. A buffer drawn from customer money would break that separation. Build it from own funds and committed facilities.
Related terms
Sources
- Consultation Paper on Liquidity Buffers and Survival Periods (CP28) · Committee of European Banking Supervisors (hosted by the European Banking Authority)
- Liquidity Regulation and Central Banking (speech by Governor Jeremy C. Stein) · Board of Governors of the Federal Reserve System
- International Money Express, Inc. Form 10-K for fiscal year 2024 · U.S. Securities and Exchange Commission (EDGAR)
- The Payment Services Regulations 2017, regulation 23 (Safeguarding requirements) · legislation.gov.uk (The National Archives)
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