Managing Government Cash

1. Contextual and institutional factors

Abstract

This chapter identifies key contextual and institutional factors that cash managers consider when pursuing their core objective. These factors include the objectives and scope of activities, arrangement with the central bank, governance and accountability practices, the relationship between cash and debt management, the depth of the domestic money market, predictability of government cash flows, and risk appetite.

Differences in cash management frameworks and policies across countries, including cashflow forecasting, liquidity risk management and cash instrument choices, largely reflect differences in these factors.

1.1. Introduction

Cash management is the process of monitoring, forecasting and managing cash flows and cash balances. Practices have evolved considerably in recent decades due to technological and financial advancements, as well as the expansion of government cash operations. Innovations in technology and the development of financial markets have enhanced the precision of cash flow forecasting and improved governments’ ability to align cash balances with needs through market instruments. At the same time, economic growth and a more significant government role in the economy have significantly increased the volume of cash managed. As a result, countries now employ far more advanced technologies and techniques to handle much larger cash volumes than a few decades ago.

Although aiming at the same objective, countries adopt different approaches to implementing cash management. The main factors affecting cash management's strategic and operational aspects are the arrangement with the central bank, governance and accountability practices, the relationship between cash management and debt management, the predictability of the government’s cash flows, the depth of the domestic money market, and risk appetite. The details and implications of these factors are examined further in this chapter.

Despite differences, common practices across the OECD area typically include: 1) cash flow forecasting that combines long and short-term forecasts, regularly updated using a data collection arrangement and skilled staff for accurate daily or weekly forecasts; 2) liquidity risk management involving cash buffers calibrated to risk preference and market depth, pre-funding maturities, liability management and matching cash flows; 3) using T-bills for predictable borrowing, and repos, commercial papers (CPs) and loans to enhance funding flexibility, while managing surplus cash through central bank deposits, reverse repos, and term deposits, with counterparty risk frameworks guiding investments. Best practice will necessarily entail differing combinations of these depending on the local context.

1.2. Objective and scope of activities

The core objective of cash management is consistently defined across all countries in the OECD Ad Hoc Group on Cash Management: ensuring the government can meet its payment obligations at all times.1 This objective is stable and mainly pursued with substantial operational autonomy.

In some cases, objectives are further refined to include specific clauses concerning various topics. This includes, for instance, the minimisation of the impact of cash management operations on monetary policy (e.g. the United Kingdom), the maximisation of investment returns under a risk framework (e.g. many euro area countries such as Belgium, France and Italy) or safeguarding against catastrophic events (e.g. the United States). These variations in objectives significantly influence policies, as highlighted throughout the report.

In addition to these objectives, cash management tools and practices can have relevance and be part of a policy tool kit for other government functions. This is especially the case for financial stability and market effectiveness and functionality.

From a financial stability perspective, public authorities’ contingency planning playbooks may assume, explicitly or implicitly, the provision of enabling solutions by the cash manager. This may include the cash manager standing ready to cover deposit protection outlays and using its shock absorption capacity in the event of a disruption to normal financing functionality. This is done without disturbing the daily business of the government.

Moreover, cash management can contribute to market effectiveness objectives and address gaps in market functionality. For example, cash management by the DMO may actively support the recycling of scarce collateral through its own operations or intermediating central bank quantitative easing (QE) portfolios. Cash management also influences bond market cost and risk dynamics through repo facility pricing and access rights for counterparties, and it affects benchmark pricing for other issuers through the dynamics of the issuance of T-bills. Regarding macro-prudential regulation, cash management is linked, at least implicitly, to maintaining adequate high-quality liquid assets, such as T-bills.

In terms of activities, cash management typically includes cash flow forecasting, liquidity planning, and short-term financing and investing functions (Williams, 2004[1]). These functions involve a wide range of activities such as daily monitoring of financial transactions, setting institutional rules for managing surplus funds in the Treasury Single Account (TSA), coordinating with government bodies to gather revenue and expenditure forecasts, analysing various cash flow scenarios, and monitoring cash markets to ensure shortfalls are met cost-effectively, while surpluses are optimally utilised (Pattanayak and Fainboim, 2011[2]). These activities are discussed in detail in the following chapters.

1.3. Arrangements with the central bank

Across countries, the relationship between the DMO or Ministry of Finance (MoF) and the central bank is the most critical factor shaping cash management operations and policies. Over the past decades, central banks have become largely independent with regard to the setting of monetary policy. Nevertheless, central banks continue to keep the TSA, though in general, they do not have any ability to lend to the state.

Typically, central banks operate as the government's fiscal agent, offering banking services to the DMO or MoF. In these cases, cash management decisions, including those related to liquidity management and funding, are made by the MoF or DMO. On the operational side, however, the central bank may also be involved in cash management by conducting payments and settlements.

The central bank may allow cash deposits as a fiscal agent of the government, though the rates paid on such deposits may or may not be close to market rates. Countries with unlimited access to market-rate remuneration from central banks tend to hold larger cash buffers as deposits In contrast, where central bank deposits offer below-market rates or when there are restrictions on their use, cash management frameworks tend to focus on money market investments instead. Despite these differences, most countries keep at least small deposit levels at the central bank (negligible in size when compared to the size of their cash operations) for operational reasons, benefiting from its security.

Lastly, the government’s cash management activity may be integrated into or kept entirely distinct from central bank operations to ensure the purity of signalling and monetary conditions control. This may lead to arrangements where the demarcation between activities may be pertinent, such as the need for each authority’s short-term instrument issuance to be kept to distinct maturity zones or varied according to circumstance. The central bank may, for instance, establish arrangements requiring the cash manager to absorb excess liquidity via central bank-directed T-bill issuance.

1.4. Governance and accountability practices

Cash management operations can either focus solely on the central government or extend to the general government or other entities from the public sector, on a mandatory or voluntary basis. This influences the scale and complexity of cash management activities, particularly in gathering data and forecasting cash flows from various entities.

Legal frameworks and budget centralisation can impact cash flow forecasting practices. Data sharing tends to be more consistent in countries with formal reporting laws. However, where informal mechanisms prevail, data quality depends on inter-agency co-operation, increasing the burden on DMOs to forecast cash flows. Without reliable data, cash managers must rely more heavily on their own forecasts. Centralised budget processes and frequent updates help mitigate this uncertainty by simplifying data collection and ensuring fiscal information is incorporated into cash flow forecasts more effectively.

1.5. Relationship between cash management and debt management

A key principle is that cash management activities should align with debt management strategies. Effective cash management avoids short-term adjustments to long-term borrowing programmes, bolsters investor confidence, and reduces the need to borrow in stressed market conditions when financing costs can rise sharply. Maintaining a cash or liquidity buffer can provide flexibility, as the cash buffer can absorb fluctuations in cash needs without disrupting issuance schedules.

Debt management strategies also affect how countries define the use of T-bills. In some countries, such as Germany, France and Italy, T-bills are issued exclusively for debt management. In others, such as Belgium and the United Kingdom, T-bills serve both cash and debt management purposes, with their role in debt management depending on whether they fund net borrowing needs for a particular fiscal year. Some countries, such as Canada and the United States, issue distinct cash management bills (CMBs), which may or may not be fungible with benchmark T-bills, and participation of primary dealers (PDs) may or may not be required.

Buyback operations and securities lending facilities, widely employed in the OECD area, further demonstrate the overlap between cash and debt management. Both tools can address cash needs while supporting debt management by smoothing redemption profiles and enhancing secondary market liquidity.

Cash management activities are generally performed by the same body responsible for sovereign debt management for efficiency gains. In the majority of OECD countries, if a separate debt management agency exists, most cash management activities are carried out by that agency. This is consistent with the fact that the same body often has a dual mandate for both debt and cash management (OECD, n.d.[3]).

The relatively small number of staff involved in the broad range of cash management activities – often less than 10 (Figure 1.1) – is feasible due to technological advancements that allow for the automation of tasks and support from or delegation of activities to other units and bodies. Since both sovereign debt management and cash management involve similar activities, and financial flows are among the largest government cash flows, significant economies of scale can be achieved by assigning debt and cash management functions to the same body. This approach streamlines IT resources and utilises scarce financial sector skills efficiently for tasks such as trading in financial markets, settlement and clearing.

Figure 1.1. Institutional arrangements and number of staff members involved in cash management

Source: Based on the OECD Ad Hoc Group on Cash Management Survey (2024).

Dedicated cash management units are common when cash management is the responsibility of the treasury but less so when it is assigned to the DMO. It appears that when the DMO handles cash management, it is integrated into the DMO’s debt management activities across its front, middle, and back offices. For example, in Switzerland, the DMO’s front office performs most cash management activities. Conversely, when the DMO is part of the treasury, it is typical to have a dedicated cash management unit focused on liquidity management, which works closely with the DMO to gather financial flow data and execute financial operations.

A dedicated unit or team does not necessarily handle all cash management activities. For instance, Italy’s cash management unit monitors account balances and manages front office liquidity operations, while middle and back office tasks are handled by separate units within the Public Debt Directorate and the Bank of Italy. This case also illustrates that bodies outside the DMO can perform part of the cash management function. A similar arrangement exists in Belgium, where the treasury does cash flow forecasting, while a department within the DMO handles short-term cash flow management.

1.6. Predictability of the government’s cash flows

Seasonality, volatility, and forecast error levels influence the level of precaution or flexibility in cash management arrangements.2 Inaccurate fiscal projections can impact liquidity, leading DMOs to maintain larger cash or liquidity buffers to mitigate forecast risk. They often consider factors such as historical cash flow volatility and the materialisation of contingent liabilities. Additionally, countries with greater foreign exchange (FX) exposure or more complex cash flows typically implement additional measures for stability, frequently relying on statistical models to adjust buffer sizes as needed.

1.7. Depth of the domestic money market

The depth and structure of the local money market play a crucial role in shaping cash management operations. In countries with deep and resilient markets, liquidity risk can be mitigated through on-demand borrowing and lending, allowing for a high degree of flexibility. Such markets are typically more accessible to advanced economies with benchmark or reserve currency status (e.g. euro area countries, the United States, and the United Kingdom), where the availability of liquidity throughout the day supports efficient cash management.

In countries with less developed or more volatile money markets, DMOs may need to rely on connections with deeper foreign markets, often through FX hedging operations or by tapping into markets within the same currency union. These countries also tend to adopt more precautionary liquidity risk management strategies to account for the inherent unpredictability of their local markets.

Moreover, there is often a dynamic relationship between a DMO’s cash management practice and the evolution of local money markets. Active participation by DMOs can help build market resilience but may also risk crowding out other participants, particularly during periods of significant government activity.

1.8. Risk appetite

The fundamental objective of liquidity policy in cash management is to ensure that the government meets its payment obligations in full and on time. However, countries approach this goal with varying levels of risk appetite. Some nations prioritise large cash reserves to safeguard against extreme stress events (e.g. the United States), while others assume continued market access in nearly all conditions and focus on minimising costs (e.g. France and Germany).

1.8.1. Country risk preferences

Countries' liquidity policies vary widely based on local risk preferences, particularly in terms of what is considered acceptable liquidity. Some DMOs adopt a highly conservative approach, viewing only cash held at the central bank as suitable liquidity (e.g. Brazil and the United States). Others take a more flexible stance, including assets that could be liquidated or used as collateral to raise funds (e.g. Canada, the majority of countries in the euro area, and the United Kingdom).

Where cash management policies rely more on the use of market-facing tools, particularly for the placing of surplus cash, there is varying tolerance for issuer and counterparty risk. In these cases, collateralised transactions are generally preferred, reducing credit exposure. However, some countries with greater risk tolerance may accept unsecured exposure, particularly with trusted financial institutions like primary dealers (PDs). Countries with more conservative policies may favour a near-zero risk approach.

1.8.2. Experience of risk events

Countries that have faced market disruptions due to catastrophic events, such as natural disasters, cyberattacks, or terrorist acts, tend to adopt more conservative liquidity policies. They might opt to maintain reserves to safeguard against future disruptions, assuming the potential for a temporary loss of market access when designing their liquidity strategies. Despite the reduced perceived need for large liquidity buffers since the global financial crisis, particularly with improved access to money markets, these cautious approaches persist and, thus, are not directly tied to concerns about market depth.

References

[3] OECD (n.d.), OECD Working Papers on Sovereign Borrowing and Public Debt Management, OECD Publishing, Paris, https://doi.org/10.1787/22264132.

[2] Pattanayak, S. and I. Fainboim (2011), Treasury Single Account: An essential tool for government cash management, https://www.imf.org/external/pubs/ft/tnm/2011/tnm1104.pdf.

[1] Williams, M. (2004), Government cash management good - and bad - practice, http://www.mj-w.net/pdfs/williams_technote.pdf.

Notes

Notes

← 1.  The Group is composed of 22 countries: Austria, Belgium, Brazil, Canada, Finland, France, Germany, Iceland, Ireland, Italy, Japan, Latvia, Luxembourg, the Netherlands, New Zealand, Portugal, Spain, Sweden, Switzerland, Türkiye, the United Kingdom and the United States. Contributions to this report were also provided by Hungary.

← 2.  Forecast errors refer to the discrepancy between forecasts and outturns. Among the reasons for deviations in cash forecasts are unrealistic fiscal projections, poor forecasting models, inadequate information, and realisation of contingent liabilities.