Cash & Liquidity Management

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From Provider to Partner: Getting More for Your Money Changing market and regulatory conditions, and new treasury requirements amongst corporations in Asia, are having a wide variety of implications, not least the change in relationship between corporate treasurers and their banking partners.

From Provider to Partner: Getting More for Your Money

From Provider to Partner: Getting More for Your Money

by Alex Manson, Group Head, Transaction Banking, Standard Chartered Bank

Changing market and regulatory conditions, and new treasury requirements amongst corporations in Asia, are having a wide variety of implications, not least the change in relationship between corporate treasurers and their banking partners. The ramifications of this shift are considerable, not only in the number and selection of banks that a corporation may choose to work with, but the way in which these relationships are structured, and across the full spectrum of banking services.

The challenges of cash investment

Traditionally, Asian corporate have never held as much large amounts of cash on their balance sheets as they do today. Today, however, strong performance and continued geographic expansion both regionally and globally have led to an increase in surplus cash. Furthermore, ongoing political and economic volatility in many parts of the world is leading many corporations to conclude that a comfortable cash buffer might be the most prudent course of action. For treasurers that have focused historically on cash, liquidity and risk management, the need to manage cash investments creates both new opportunities and challenges.

Some of the challenges associated with managing surplus cash are common to treasury practitioners worldwide, specifically the difficulty in finding appropriate repositories for accumulated earnings in an environment where liquidity is plentiful amidst quantitative easing and low interest rates. Placing surplus cash with banks is becoming increasingly uneconomic. With low (or negative) central bank rates, and with changing regulatory demands on banks (of which more below), some are charging to take deposits. For treasurers, and the boards to which they are accountable, paying for the privilege of giving cash to a bank for ‘safe’-keeping is difficult to justify.

The regulatory imperative

At the same time, viewing the situation from a bank’s perspective, there are unavoidable reasons why banks are becoming increasingly reluctant to accept cash unless it is the right tenor and amount to meet their needs. Under Basel III, banks are incentivised to bring more so-called Operating Account (OPAC) deposits and long-term (greater than 30 days) funding into their overall funding structures. Regulators ascribe more value to OPAC deposits because they are deemed ‘stickier’ liabilities in the context of financial instability, whilst term deposits address the short-term funding issues of the crisis.

While this makes sense for banks (and regulators ensuring their resilience), it distorts the normal market yield curve, in effect creating a V-shaped yield curve. This makes less sense for treasurers, who have to date maintained minimal non-OPAC overnight balances and invested excess cash holdings at maturities that match their liquidity needs. Now, corporate treasurers depositing cash with their banks need to find ways of extending their deposit term beyond 30 days, or enter into a ‘perpetual’ 30-day term deposit structure. Bearing in mind that cash flow forecasting is already a major challenge for many treasurers, the opportunity to invest in overnight and short-term deposits has been an essential element of many companies’ cash investment strategy, but this opportunity is fast disappearing.

Related to this is the imbalance in interest rates and regulatory conditions in different countries. With banks operating as subsidiaries in some markets, to which local loan to deposit ratios apply, the effect is that a dollar in one place is not the same as a dollar in another. On one hand, therefore, treasurers may seek to place deposits in higher return locations where banks are competing to obtain local deposits, Singapore and Hong Kong USD rates vs onshore USD rates being a case in point. However, treasurers need to be aware of sovereign risk in the relevant country, levels of liquidity and the potential risk of cash being ‘trapped’ as a result of restrictions on the movement or convertibility of funds on maturity.

The end of global banking?

The impact of capital constraints on banks’ business models has become increasingly apparent in recent years, but new rules on liquidity are arguably creating even greater complexity, both for banks and their clients. Until the global financial crisis in particular, corporate treasurers sought international banking partners that could offer consistent services, products and pricing across multiple regions and markets. This model is now under pressure as banks need to manage their business in individual countries as standalone entities. This is resulting in some banks exiting certain markets, while others may be obliged to discontinue products, most commonly balance sheet and funding-intensive products such as lending and trade finance. Over time, banking consolidation is likely to result in less choice for treasurers, with only the largest and strongest banks continuing to provide a broad range of services, and a wider group of local and regional banks with specialist capabilities in specific markets or products.

Treasurers’ need to access the full range of services may result in some appointing more banking providers; however, existing relationship banks will also demand ‘fair’ share of a client’s wallet to ensure that relationships are still commercially viable given the additional costs and constraints of doing business. To offset the funding requirements of trade finance for example, banks will seek a greater share of a client’s cash management business and operating balances. In short, the relationship between credit and deposits will become tighter and more sharply defined. Pure credit providers will become less common in the market, whilst a more complex wallet sharing exercise will emerge.

Since the global financial crisis, many corporate treasurers have become less motivated to strive for a single banking relationship with a global and universal bank for all their needs ‘under one roof’, in favour of regional mandates. The parallel trends of the decline in the number of universal banks, and the tighter links between credit and cash could result in a further shift from regional mandates towards sub-regional and country based mandates to create a viable group of banking providers. Corporates will think carefully about how each bank fits within a group of banks serving a range of diverse product and geographic needs. Is it purely a debt provider with a domestic deposit base in the corporation’s largest markets, but constrained by lack of capabilities in other regions? Is another bank that lacks a natural funding base better able to provide for advisory and capital markets needs?

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