Strategic Treasury

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The Unintended Consequences of Banking Regulations This article highlights the priorities and experiences of treasurers in Germany understanding and complying with evolving financial regulations, but these are just as relevant to treasurers in other countries and regions.

The Unintended Consequences of Banking Regulations

by Helen Sanders, Editor, TMI

Understanding and complying with evolving financial regulations is one of the most challenging aspects of treasurers’ role, particularly for organisations operating internationally. Local, regional and global regulations may conflict or overlap, but an added difficulty is that treasurers are often affected by rules that are not directly targeted at them. As Andrej Ankerst, Head of Cash Management Germany and Austria, BNP Paribas explains,

“Since the global financial crisis in particular, corporate treasurers have had to deal with a diverse range of regulatory developments. Some of these, such as SEPA and EMIR, have a direct impact on processes, systems and reporting. However, just as important are regulations that are not targeted at corporations specifically, but which have indirect implications, particularly banking regulations such as Basel III. Treasurers may be less aware of the detail of these regulations as compliance is not an issue in the way as ‘direct’ regulations would be, but the impact may be at least as significant.”

Furthermore, regulatory change does not happen in isolation, but alongside other developments that may reduce or exacerbate the impact, particularly the effect of low or negative interest rates. The key for treasurers is to keep up to date with regulatory developments, engage with banks, technology partners and treasury associations, and anticipate the implications for their business. As this edition of TMI is being launched at Schwabe, Ley & Greiner’s annual Finanzsymposium event, this article highlights the priorities and experiences of treasurers in Germany, but these are just as relevant to treasurers in other countries and regions.

Countdown to Basel III

Treasurers identify Basel III as the most significant regulatory change on the horizon, even though the obligation to comply is on banks rather than their corporate customers. The Basel III regulatory framework was first agreed in 2010-1, but it has been subject to a number of revisions, clarifications and timing changes, which has made some treasurers complacent about the impact until recently. Although Basel III aims to increase the resilience of the banking sector by specifying minimum capital and liquidity ratios amongst banks, clients are inevitably affected as banks revise their operating model, and therefore their solutions and pricing. The official implementation deadline is now 2019, but banks are implementing sections of the regulation at different rates, and some treasurers are already observing changes in their banks’ offerings, pricing and relationship demands.

One of the most immediate and significant areas in which Basel III affects treasurers is liquidity, with implications on solutions such as notional pooling and bank deposits. Steven Lenaerts, Head of Product Management, Global Channels, BNP Paribas discusses,

“Looking at the liquidity coverage ratio (LCR) under Basel III which is now taking effect, different sources of liquidity have different value to a bank. For example, corporate deposits have more value (particularly when part of a cash management structure) than a financial institution deposit where the runoff rate is perceived to be higher. The difficulty, therefore, is to balance banks’ regulatory obligations with their clients’ liquidity and investment needs.”

In practice, two types of deposit (from non-financial corporations) are attractive to banks and will therefore be better rewarded: firstly, deposits linked to operational flows, and secondly, deposits of above 30 days, that allow banks to demonstrate that they are able to sustain a period of 30 days of market stress. As Lothar Meenen, Head of Trade Finance and Cash Management Corporates Germany, Global Transaction Banking, Deutsche Bank says,

“Under the new liquidity standards, the quality of banks’ funding is very important, and banks generally do not derive much value from non-operational cash; rather, they need to ensure that deposits are comprised of operating cash, or held over a longer tenor to comply with liquidity rules.”

He continues,

“This creates considerable challenges for corporates with surplus cash to invest. It will no longer be an option simply to leave balances on accounts or in deposits that should be invested in the capital markets.”

The elusive 30-day tenor

Some treasurers, particularly those for whom accurate cash flow forecasting is difficult, are likely to find it difficult to invest beyond 30 days. Some are likely to consider other instruments such as money market funds (MMFs) although these are also affected by regulatory change, initially in United States but ultimately in Europe too. However, many are taking this in their stride, particularly given the wider challenges of generating a return and avoiding erosion of capital in a low or negative interest rate environment. As a result, some are starting to review investment policy and segment surplus cash into different investment categories (e.g., short-term, core and strategic cash), but many others have not yet proactively addressed this issue. Andrej Ankerst, BNP Paribas summarises,

Andrej AnkerstBasel III, together with the prolonged negative interest rate environment, is prompting treasurers to review their investment policy, as they still need to generate a return on surplus cash. At the same time, they still need to manage issues such as counterparty risk, so there are multiple elements driving investment policy. To do this, treasurers are analysing their liquidity timing needs more precisely, and determining the most appropriate investment options to meet these timing needs, such as term deposits and funds. At BNP Paribas, our Corporate Deposit Line is dedicated to supporting treasurers to find the right investment instruments to achieve their yield objectives whilst managing risk at an acceptable level.”

Lothar Meenen, Deutsche Bank concurs,

“Corporate treasurers are obliged to consider other investment options, both as a result of changing bank appetite but also of low or negative interest rates. Currently, treasurers investing for less than one year in EUR will receive a negative rate, so they need to segment their cash more effectively, and only keep essential cash invested for less than this. Previously, many companies separated cash for pensions and acquisitions, for example, but the rest was held in the normal treasury ‘bucket’. Now, they need to be far more specific and strategic about when cash is needed, and drive investment decisions accordingly.” 

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