- Suzanne Janse van Rensburg
- Regional Head of Liquidity and Investments, Global Transaction Services EMEA, Bank of America Merrill Lynch
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.[[[PAGE]]]
Financial regulatory reform
Aside from developments in individual countries, regulatory change is affecting liquidity management at a global level. Basel III is the most significant development in recent years, particularly in light of the Liquidity Coverage Ratio (LCR). Banks in the US began reporting on LCR in January 2015; European banks will begin in October 2015. One might assume the delay in implementation date provides European banks an advantage over banks operating in other jurisdictions; however US banks for example, have a head start in understanding the true cost and impact of the new regulation upon their business models.
The impact of regulatory change on corporate liquidity management is also becoming clearer. Companies are already finding that some banks are not willing to quote for time deposits unless there is a strong operational relationship already in place. Cases have been documented of deposits being turned away, or banks declining to accept excess cash during critical quarter ends. The unintended consequence of all this is that companies may be driven to concentrate their business on a smaller number of banks – even though they might wish to do the opposite in order to diversify counterparty risk.
At the same time, there is concern that different regulatory developments may be conflicting with each other. Whereas Basel III encourages companies to move any cash which is not operational in nature off the bank’s balance sheet, significant changes are also coming into effect for money market funds (MMFs), which are the most widely used off-balance sheet product in certain jurisdictions. A survey undertaken in 2014 revealed that these changes could lead to a significant shift away from MMFs money market funds, with a significant number of investors likely to move their cash into demand deposit accounts.
Another notable change is the Organisation for Economic Co-operation and Development Base Erosion and Profit Shifting (BEPS) project. As a result of this project, companies are beginning to involve their tax teams at a much earlier stage when creating liquidity management solutions, and are asking their banks more detailed questions about tax.
Time to take stock
From regulatory change to geopolitical tensions, there are many pressures and developments around the world which companies should take into account when managing liquidity. However, there are also many opportunities for improvement. With so much change in the last few years, it is a good time for companies to take stock and ask whether they are fully up to date with the latest developments.
It’s clear that innovation is needed to help companies invest their cash effectively under Basel III. Some progress has been made in developing products such as 31 day evergreen accounts, which carry a notice period in order to help banks reward longer- term deposits that take them beyond the term the regulation seeks to address. However, it’s fair to say that a ‘silver bullet’ product has yet to be created in the industry. While much attention and effort has been focused on this topic, the significant regulatory constraints are making it difficult for banks to innovate as it relates to deposits.
Despite these challenges, there may be opportunities for treasurers to invest cash more effectively if they can change their mindset. Not very long ago, cash held for 30 days was considered short-term, less than a year was considered medium-term and anything held over a year was viewed as long-term. Today, because LCR looks to address cash within a 30-day period, the picture is very different: cash held overnight is now thought of as short-term, a week is considered medium-term and a month is regarded as a long-term horizon for many corporates. As a result, corporates will need to adapt and work closely with their banks as treasurers consider more effective ways of placing liquidity beyond 30 days.
For companies operating in Europe, another interesting topic is SEPA. While SEPA is now largely implemented, relatively few corporates have truly taken advantage of the benefits by consolidating their account structures in Europe, rather than maintaining multiple accounts in different countries. This may be something of a missed opportunity, and companies could revisit this topic by asking what benefits they could achieve by moving to a more streamlined structure using one or two euro accounts.
More generally, it may be a good moment for companies to reconsider their investment policies. Many treasurers reviewed their policies following the events of 2008, but the world has moved on significantly since then. There may be some benefit to asking whether measures put in place at the height of the financial crisis are still applicable today – and if not, whether reviewing the company’s risk appetite, for example, could lead to a more effective liquidity management structure.
Finally, companies should ask themselves whether they are taking full advantage of their banks’ knowledge and expertise. Banks spend many millions of pounds, dollars and euros on understanding in great detail everything from the geopolitical environment to the impact of new regulations. Some are more proactive than others in keeping corporate clients informed on these issues – so treasurers should aim to build relationships where information is shared in a constructive way.
In conclusion, the principles of liquidity management may not have changed, but the world in which corporate treasurers operate has shifted considerably. Treasurers should be aware of the complex and evolving challenges they face. Equally, they should be open to exploring any untapped opportunities which may help them gain better control over their companies’ cash – whether that means reviewing their investment policies, revisiting their liquidity management structures or opening up closer lines of communication with their banks.
