Published: June 01, 2012
While commentators tend to refer to the global financial crisis as a specific occurrence that took place in 2008-9, it is clear to every treasurer that the crisis was not just a one-off event, but simply one phase of a longer period of change, volatility and uncertainty that is still being played out today. Risk management swept to the top of treasurers’ agendas in 2008, but rather than being superseded by other business needs, it has remained firmly positioned at the top of treasurers’ list of priorities.
While its importance has not changed, the concept of risk management has shifted considerably over this period. In 2008-9, many treasurers found that their risk policies and models were not designed to take into account such extremes of volatility, and they therefore had to take remedial action. Since then, however, most treasurers have implemented robust risk management policies, procedures and reporting that are appropriate to a new economic era.
Consequently, risk management is now less about managing fear, and more focused on identifying ways to create competitive opportunity by reducing risk effectively. Since the global financial crisis, treasurers have found an enhanced role at the top of the organisation and many are using this mandate to extend their influence more widely across the business to anticipate and respond to business challenges. Consequently, treasurers are addressing not only traditional market risks, but also becoming more involved with commercial issues, such as credit and supply chain risk.
As a bank, we have always supported treasurers’ financial risk management objectives with risk expertise and solutions. The challenge facing us now is how to support these changing requirements and aspirations that require a greater depth of understanding of the needs and constraints of the wider business, not simply treasury. Furthermore, our role is also changing - treasurers are not only seeking our advice on the choice of solutions to address business challenges, but also asking us to share our experiences derived from working with corporations globally.
An example of the expanding role of the treasurer is the growing synergy between cash management and trade finance. These were typically managed as separate functions before 2008, but treasurers are increasingly taking responsibility for both activities and combining them in a more proactive approach to optimise working capital and manage credit and supply chain risk. While these risks are critical to every organisation, different companies and industries typically have diverse approaches to managing them. For example, some use supply chain financing solutions to engage key suppliers and maintain the resilience of the supply chain, while others avoid trade finance solutions and manage their vendor relationships as part of a standard procurement process.
To address the wide variety of corporate needs in cash and trade, we have brought together our own cash management and trade finance functions at Deutsche Bank to both anticipate and respond to changing organisational structures amongst our customers. By effectively mirroring our customers’ business functions, we can provide solutions that address the full spectrum of working capital, credit and supply chain requirements through holistic, integrated solutions. In addition, we have realigned our expertise and solution design by industry segment. This structure allows us to gain a greater depth of understanding about our customers and provide advice and bespoke solutions that are specifically targeted to meet each industry’s challenges and needs.[[[PAGE]]]
Market liquidity has been constrained since 2008 and this situation is likely to continue with regulations such as Basel III approaching. Consequently, treasurers are becoming more proactive in ensuring they have visibility over their global cash balances and mobilising cash across the business, reducing ‘trapped’ cash wherever possible. Carrying out their increasingly demanding roles is not always easy in a global context, particularly as treasurers can rarely call on additional resources. Consequently, they need to ‘do more with less’ and work with their banks to ensure that suitable account and liquidity management structures and appropriate technology, which deliver the right amount of data, are in place. Investing in this process is extremely valuable - once such structures are in place, data can be transformed into valuable information on which liquidity decisions can be made. Treasurers can also mobilise cash to finance the business, reduce reliance on external funding and maximise investment opportunities.
Despite the benefits of optimised cash visibility and liquidity management, investments in treasury projects are often difficult to justify, particularly when resources come at a premium. Yet, with the end dates for SEPA migration now defined, SEPA should be a catalyst for change for many companies. As migration is obligatory, treasurers will have no option but to start planning their projects if they have not already done so. While migrating to the new payment instruments, both SEPA Credit Transfers and SEPA Direct Debits bring some advantages, such as a reduction in cross-border payment fees and standardised formats across the Eurozone. The advantages can be even greater as part of a project to centralise treasury, payables and/or receivables, bank connectivity or liquidity optimisation.
One typical objection to SEPA migration is that there are still uncertainties about definitions and timing. The end date has now been set and ratified by the European Parliament as 1 February 2014. While there are still some small uncertainties about the impact of SEPA on some local payment instruments, such as RIBA in Italy, these small outstanding issues should not deter treasurers from planning their migration, and determining what concurrent benefits could be achieved. Banks such as Deutsche Bank have considerable experience in supporting clients in their implementation. As we move towards 2014, the pressure on SEPA expertise will increase, so companies will inevitably gain the best access to resources and advice.
Treasurers’ risk and liquidity management objectives are not only centred on regions such as Europe where they potentially have the longest heritage. Asia, and in particular China, represents a substantial growth opportunity for many companies. The Chinese currency, renminbi (RMB), is still under-represented compared to the scale of the economy, and the government is actively focused on addressing this through gradual liberalisation. For companies with a significant exposure to RMB through payables and/or receivables, or that have major investments planned or in place in China, the liberalisation of RMB is a major opportunity.
We are already seeing RMB used as a settlement currency for cross-border trade, which brings advantages not only for Chinese companies, but foreign companies too. For example, companies’ competitive position with Chinese suppliers and customers is enhanced, and RMB exposure is reduced by netting RMB payables and receivables, eliminating currency risk and protecting margins. Bilateral agreements between China and countries such as Brazil and South Africa for settling transactions in RMB as opposed to USD will also bring wider implications as similar agreements are concluded with other countries.
RMB opportunities are not limited to trade settlement, however. Increasingly, we are seeing opportunities for managing liquidity in China, as well as a growing offshore RMB (known as CNH) market for both issuance and investment. While Hong Kong is currently the hub for CNH, there is growing interest in developing London as a CNH centre, with a number of key international banks, including Deutsche Bank, spearheading this initiative. The Chinese government is supportive of these efforts, and we are now witnessing substantial efforts by major international banks to create the required infrastructure and develop the necessary risk and liquidity management instruments. The growth of London as a CNH hub will bring significant opportunities for treasurers to create cohesive liquidity, risk, financing and investment strategies at a global level, supported by leading banks, such as Deutsche Bank.[[[PAGE]]]
Managing risk is no longer simply a fire-fighting effort for treasurers, but a value-creating strategic activity for the whole organisation. The combination of risk management expertise, robust systems, trust amongst senior managers and the right banking relationships can bring powerful benefits. At Deutsche Bank, we are committed to helping treasurers harness opportunities that maximise value to the business by managing risks effectively and across the enterprise.
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