Cash & Liquidity Management

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Mission Critical: Keep Liquidity Flowing Liquidity is what keeps companies afloat, and some recent developments are providing companies with opportunities to manage their liquidity more effectively.

Mission Critical: Keep Liquidity Flowing

by Suzanne Janse van Rensburg, Regional Head of Liquidity, Global Transaction Services EMEA, Bank of America Merrill Lynch

Liquidity is what keeps companies afloat. In order to meet their obligations, corporate treasurers need to have the right cash in the right place, at the right time. Equally, treasurers need to make the most of internal sources of cash in order to reduce external funding needs, mitigate risks and, when possible, invest cash effectively. In order to achieve these goals, treasurers aim to gain more visibility and control over their liquidity, free up trapped balances in regulated markets and obtain the best possible return on excess cash.

This is nothing new. What has changed, however, is the regulatory, geopolitical and macroeconomic environment in which companies operate. Local market conditions and global regulatory developments can affect companies’ liquidity management choices and pose significant challenges. At the same time, some recent developments are providing companies with opportunities to manage their liquidity more effectively.

Global dynamics

The broader a company’s geographical footprint, the more challenging it is to manage liquidity effectively around the world. However, technology can help companies overcome these challenges. As more companies adopt a global operating model, they are using increasingly sophisticated tools to manage their liquidity. These tools can provide more readily accessible data, from consolidated balance information to a clear view of counterparty exposures. Technological development has also led to increased levels of automation, greater visibility and more effective centralisation of cash and liquidity management.

That said, companies operating at a global level face numerous challenges – not least from geopolitical factors. When companies hold cash balances in a particular country, they need to be mindful not only of existing market conditions, but also of any geopolitical risks which could impact that country in the future and result in cash becoming trapped.

The continuously evolving situations we have experienced across many jurisdictions in recent years, continue to be a concern for both banks and corporations. Companies are actively asking their banks about the possible impact of any capital requirements or regulations which might prevent them from sweeping cash in and out of the country, and are looking for solutions that will enable them to continue operating in a worst case scenario.

Other specific factors and issues may need to be considered, depending on the company’s geographical footprint. In the US, for example, consumer confidence and economic growth remain muted, while much has been said about the possibility that interest rates will start to rise later in the year. An increase in rates would, of course, affect treasurers’ liquidity management decisions – but it is important to note that if rates do rise, there will most likely be a lag before companies are able to benefit from higher rates on their balances. In Asia, developments affecting liquidity management include the liberalisation of restrictions on the renminbi, which has enabled companies to engage in two-way sweeping – a development which is currently attracting a lot of interest from companies operating in China. The appreciation of the US dollar against Asian currencies is also having an impact on both companies and banks from a balance sheet management, revenue and profitability perspective. Hong Kong, meanwhile, is attracting greater interest from companies as a location for regional treasury centres.

In Europe, the arrival of negative interest rates in Switzerland, Sweden and Denmark has made the low interest rate environment even more challenging, particularly as different banks have responded to this development in different ways. The decision of whether or not to cover the resulting costs by charging clients for balances in these currencies depends very much on individual banks’ balance sheets, and whether banks are direct clearers of specific currencies or are required by regulation to hold certain currencies at central banks. Either way, it’s clear that banks are not using this development as a revenue generating exercise.

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