Cash & Liquidity Management

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Through Rain, Wind & Snow: The Season for Liquidity Management The days of cheap, readily accessible cash are over. In her cover story this month, the Editor discusses the implications of Basel III for corporates, and shows how, with a higher premium on liquidity in the long term, treasurers now need to look beyond crisis management to a long-term business model for maintaining access to liquidity, and enabling the company to invest in business growth and competitive advantage.

Through Rain, Wind & Snow: The Season for Liquidity Management 

by Helen Sanders, Editor

You can tell that autumn has arrived: it’s very chilly and it’s pouring with rain. And it’s barely September. This is not a heartening introduction to an article on how corporate treasurers can deal with the challenges of constrained liquidity. After all, as far as I can tell, there appear to be absolutely no restrictions on liquidity whatsoever, certainly of the precipitation variety. Despite this, many treasurers have been forced to take measures to ensure not only their own liquidity, but also that of their suppliers and customers. While market confidence appears to be improving, as we approach winter, rain truns to snow, and similarly, with the proposed regulatory changes of Basel III, whatever the economic forecast, liquidity is likely to flow less freely than it has in the past. Treasurers responded well to the financial crisis in many respects, and have become accustomed to managing the financial needs of the company in a constrained environment. What is clear, however, is that there is no way back to the heady days of cheap, readily accessible cash. 

Introducing Basel III

The Basel Committee on Banking Supervision issued issued a new set of proposals (known as ‘Basel III’) in December 2009 to replace the existing Basel II capital adequacy requirements. These proposals aim to increase the resilience of the banking sector to future crises and impose more stringent regulations for capital adequacy, leverage ratios and liquidity requirements. The new rules will be formalised by the end of 2010 following feedback from banks, financial institutions and rating agencies, and will be rolled out over a two year period. The key proposals of Basel III are outlined in Figure 1, but many organisations have expressed concerns over the severity and speed of implementation of these proposals. There have been some efforts to make the Basel III measures less draconian, such as the revised counter-cyclic buffer proposals issued in July 2010, but as Erik Seifert, Head of Cash Management, SEB advises,

“While there is still some uncertainty about what the final requirements of Basel III will be, banks’ ability to lend will undoubtedly be restricted, and the value of relationship-driven deposits will increase. We are already seeing some evidence of a change of behaviour amongst banks in recognition of this, and the battle for liquidity has commenced, at least at a skirmish level.”

While this is not the only likely repercussion of Basel III for corporates, as long-term financing and investment are also impacted, the increased value of liquidity and importance of deposits has implications for both corporates and banks. For banks, capital structure is of particular importance, and as Erik Seifert, SEB continues,

Transaction banking is becoming increasingly important for banks, as it is key to attract deposits into the bank.”

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