Head2Head: Lost in Translation

by Bruce Meuli, Global Transaction Services Advisory executive, and Jonathon Traer-Clark, Head of Strategy, Global Transaction Services, Bank of America Merrill Lynch

JTC  Bruce – although we may not always agree, we do share some common ground including a birthday. More relevant though, is that we have both worked in a corporate and a bank across a range of treasury and finance roles. In my current role at Bank of America Merrill Lynch, I often mentally step across into my former corporate treasurer role, as I find the ability to compare and contrast experiences and priorities from both sides invaluable.

BM I agree – the roles share many common issues but the priorities and challenges also differ substantially at times. Let’s take an initial common point: the challenges associated with disparate systems, poor data quality and analytical ability. Although the problems are similar, the motivation and drivers are not. Specifically, the bank treasurer has to invest in systems and reporting capabilities that comply with regulations such as the Basel Committee on Banking Supervision (Basel III) requirements. Therefore, real-time reporting capabilities and the data and information systems required to support compliance are the priority. Conversely, corporate information technology investments are often driven by a desire to improve operational capability in pursuit of risk and operational excellence.

JTC True, but equally, you could argue that regulation drives a corporate’s desire to improve. Remember too that they face their own direct regulatory requirements. Let’s look at the primary functions or role of a bank vs a corporate treasurer. Funding, balance sheet management, FX, interest rate and liquidity management, capital allocation and cash management are all common functional objectives but there are significant differences in the actual processes. Take funding: a key investment area for bank treasurers has been the development of funds transfer pricing models to incorporate the full cost of liquidity, risk, term and balance sheet commitments. This differs significantly, in both complexity and magnitude, from a corporate funding model.

BM Yes, but in certain respects – in the area of equity and market debt as opposed to capital allocation – there are similarities. If you include the corporates with an in-house banking structure and/or an internal finance entity, then parts of the corporate treasurer’s role begin to resemble that of a bank. Add to that intercompany funding requirements and transparent transfer pricing mechanisms, and more similarities with bank treasury processes emerge. 

JTC On that, there is one major difference between bank and corporate treasury – the former can only ever be a profit centre. With the latter however, most corporate treasuries are cost or value centres, with few set up as a profit centre. This can lead to fundamental differences in approach. Looking at the current extended period of low interest rates for example, banks are still challenged to meet risk/return targets, whereas corporate treasurers mostly benefit, especially in their ability to access low-cost funding.

BM Sure, but if you are holding significant cash balances the low return on this cash can partially offset the funding benefit. This argument is exacerbated with negative interest rates on some key currencies to the point where these balances are incurring costs. There is also the longer-term issue that some corporates may adjust their business model to a low interest environment and then face challenges when they need to readjust as rates rise. Another common point that I find is not widely understood by the corporate treasurer is that as banks also provide services to other banks, a bank treasury effectively becomes a buyer of bank services in the same way as a corporate treasurer. Even so, the bank-bank relationship is complex and differs to that of a bank-corporate one, as it is normally a reciprocal relationship based on capabilities.

JTC But if a bank is providing services to another bank, this pre-supposes that there is usually a corporate client that will use these services in some way. This potentially complicates the delivery of these services as the supplying bank is not in direct contact with the end consumer – the corporate. These complexities become even greater when you consider issues such as systemic risk or contagion, especially for global multinationals. Not only do these corporations have a large number of banks, bearing in mind the breadth of their activities and footprint, to which they are looking to allocate an appropriate share of wallet, they also have indirect relationships to consider that impact on credit risk. Many corporates are continually challenged to simplify and streamline their banking infrastructure, but this is often very difficult to achieve in practice, whether for regulatory, coverage or technology reasons.

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BM Let’s move to a common objective: the need for the treasurer to be strategic and to add value to their business. Since 2008/9, due to the re-prioritisation of global liquidity management and regulatory demands such as MiFiD, Basel III, Payment Service Directives and Dodd-Frank, the bank treasurer’s role has been transformed. By adopting a more prominent role in governance and control, bank treasurers are instrumental in redefining bank business models and product and client strategies, with the aim of achieving sustainable risk/return objectives. 

JTC This transformation has been out of need – the so-called ‘burning platform’ – but corporate treasurers do not always have this uncompromising driver. Treasurers have to get buy-in from senior management in order to position treasury as a consultant or advisor to the business – for example, leading on enterprise working capital programmes.

BM So, when you compare and contrast the two roles you see a lot of commonality; the differences are mostly in the detail. Bank and corporate treasury may basically have the same function and objectives, but the priorities and drivers may differ, as do the means of execution. I do see a longer-term trend towards more commonality as corporate and bank treasury operations mature. So back to your initial comments Jonathon, both groups can gain significant benefit in being able to view the relationship from the other’s perspective. For example, if a corporate understands the cost/risk profile of a banking partner, it may be able to provide flows to that bank that are attractive for the bank at no disadvantage to itself, such as deposit balances by currency. Equally, for the corporate treasurer, understanding the cost/risk profile of core relationship banks will provide insight into the sustainability of their model and delivery of service capabilities. For corporate treasurers, understanding the needs and priorities of the bank treasury may help to explain some of the changes that banks are making and the possible impact on the their customer offerings. However, in the end, bank and corporate treasurers are part of one extended process with one treasurer’s accounting liability being the other’s asset.

JTC One final observation I would make is that many large corporates also have banking licences, carrying several of the same obligations you’ve referred to. It would be interesting to see if this additional element helps them have more fruitful conversations with their banks as fewer elements get lost in translation…

TMI Comment - by Helen Sanders, Editor

Providing comparison between bank and corporate treasuries is a relatively uncommon but welcome analysis. Bruce makes the interesting point that while bank treasurers’ technology decisions are motivated by regulatory compliance, corporate treasurers’ decisions are more motivated by operational concerns. I’ve pondered this and do not necessarily agree (sorry Bruce!). As Jonathon notes, corporate treasurers also have compliance issues to consider, with IFRS 9, new rules on prime money market funds in the United States etc. just two of many. While operational and risk considerations are obviously of vital importance to corporate treasurers, these are also priorities for bank treasurers alongside compliance and strategic objectives, and are indeed critical to achieving them. Furthermore, Jonathon notes that treasurers have to ‘earn’ or demand a place at the top table of strategic decision-making. This is true in many cases, although it has often become easier since global financial crisis; however, the right technology and information investments are essential in facilitating this more strategic as well as operational role.

These are relatively small observations, however, compared with the most important conclusion of this month’s ‘head to head’: namely that as regulatory compliance, whether direct or indirect, continues to drive behaviours and priorities, the better that both sides understand the needs and constraints of the other, the more balanced the extended process that Bruce refers to can be. This is a crucial observation that should help to inform bank-corporate dialogue, and create appropriate responses to the changing regulatory and market environment in which we find ourselves.