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Cash & Liquidity Management
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Cash Management in a Credit Crisis: A Case Study

A case study

by Helen Sanders, Editor

Every treasurer has been forced to review how they manage their cash and liquidity since the crisis first struck. In this case study, we use a real-life example of a global insurance company and explore how treasury has dealt with the changing marketplace.

Cash management background

As an insurance company, the firm has substantial operational cash flow together with fiduciary money owed to insurance carriers. With such high cash balances managed by the company but owed to third parties, the financial and reputational risk of counterparty default is huge. Cash management and short-term investment is a priority for treasury, and principle preservation is the primary investment objective.

With many of the banks experiencing a downgrade in credit rating, treasury is increasingly finding that it needs to spread its bank exposure risk. This is easy to do for short-term investment activity such as deposits, but it becomes more difficult when it comes to cash management. Corporates need to make decisions about the banks they want to work with based on those that are most likely to be around in the future. Like many other firms, the company has needed to focus carefully on where to place the company’s cash. Even in situations when a national government has stepped in to support a bank, and not every bank can be bailed out, it could easily take three to four months to retrieve the cash, creating potentially serious liquidity problems, FX risk and a loss of return over this period. A company in this position may have to borrow to cover the liquidity gap or lose out on business investment opportunities.

Short-term investments

Treasury has considered government securities as investment vehicles; however, these are typically only issued in three currencies which normally create the fewest difficulties. It uses money market funds (MMFs) in Latin America, Europe and the United States. It is important to be familiar with the investment portfolio in each fund, so treasury receives regular updates on fund assets and reviews both individual holdings and asset classes to ensure that there is nothing of concern and that decisions comply with internal investment policies.