The Growing Impact of Regulation and Technology

 

by Chris Paizis, Head of Markets Distribution at Barclays Africa (ex SA)

Banks are having to redefine themselves, looking five or 10 years ahead to make sure they are prepared for a changing financial order. It’s an exciting journey as we develop new and innovative products, explore new ways of doing business and find new revenue streams. This focus on innovation is the response to two very different forces impacting the banking industry – new regulations which have made us do things differently and technological advances which have not only enabled us to do things differently, quicker, easier and with less risk, but have opened up whole new areas of innovation.

Banking is not the same as it was 10 years ago and certainly it's likely to change drastically over the next few years.

These dual forces - restrictive regulation and technological advances - have been the two biggest drivers of change in bank treasuries in recent years. And, because companies are our clients and our partners, these changes are affecting corporate treasuries as well. The combined impact of regulation and technology has been to change banking business models. Banking is not the same as it was 10 years ago and certainly it’s likely to change drastically over the next few years.

Regulation has been a spur to change

Particularly since 2008, regulation has weighed very heavily on the banking system. Regulations translate directly into higher costs which of course also mean higher costs for our clients. It has not just been the regulations that followed the 2008 financial crisis – we have seen crisis after crisis since then. The regulations that evolved made it much more expensive to do some parts of the traditional banking business. Even though banks have lobbied quite heavily on behalf of clients (on some specific regulations) to regulators, it is, however, difficult to change regulations. It’s much easier to change business models.

So banks have responded by changing the way they do business. Banks are having to downsize some traditional areas of banking simply because it doesn’t make economic sense anymore. There is also much less activity in the banking industry in the way of proprietary trading compared to pre 2008. We have had to take a very close look at the range of counterparts that we deal with, for example US based entities have specific rules when it comes to derivatives, and there are specific regulations on whom they can transact with. We are making a lot of traditional banking business less bank dependent. At the same time, we are looking for different areas where banks can add value through our expertise and our global reach.

An example of traditional bank activities affected by regulation is the area of very capital-intensive long-term funding (and associated hedging). Ten years ago you could access 10-year bilateral bank funding and interest rate hedging quite cheaply. Since then a whole array of regulations means that it’s become too expensive, driven mainly from a capital perspective, the cost of which has become a lot higher in recent years. So now banks might not necessarily want to do a 10-year loan and a 10-year hedge, while increased costs mean that clients are less interested. The result is less investment in some areas as banks focus more on businesses that still make economic sense for both their clients and them.

If I were in corporate shoes I might be looking at different forms of debt. Accessing the DCM markets more or looking at more innovative ways to raise debt / different kinds of funding – all of which will have a direct impact on corporate margins.[[[PAGE]]]

Treasuries have a key strategic function

Banking and corporate treasuries are looking at the same issues from slightly different perspectives and with slightly different priorities. In banking, the treasury function is the heart of the bank because the treasury is at the core of the banking business. Without the treasury none of the other divisions of the bank would be able to operate. We wouldn’t be able to raise funding for our clients and we wouldn’t be able to operate our retail deposits business effectively.

Bank and corporate treasuries have similar functions, ensuring that the organisation is funded sufficiently, that the cost of funding is appropriate for the organisation and its individual units, that liquidity is available through the cycles and that all risks – be they commodities,  foreign exchange or other risks – are hedged appropriately. In banks we add in sales and trading – at Barclays it’s under the heading of Markets, which essentially is global financial markets. Trading refers to our market  operations where we trade with other banks across different asset classes, and sales is the client side of that. Because of the nature of the business, bank treasuries and markets teams are much larger and spend more on technology because it’s a core  part of a bank’s job to manage financial markets risks, where it’s not a corporation’s core business.

In a corporate treasury it’s very much around the specific business model of that particular organisation. By definition, banks are able to run a lot more risk while we hedge our clients’ needs, and effectively intermediate between lenders and borrowers which is the key job of banking.

Bank treasuries have always been strategic because they are central to the business.

Banks carry financial markets risk in general and act as an intermediary between different kinds of risks and different types of entities with different financial needs. Bank treasuries have always been strategic because they are central to the business. Corporate treasuries are playing an increasingly strategic and central role in company operations however. In many large companies, it’s the treasurers who are at the forefront of many key decisions, given global market volatility and a constantly changing global economic picture.

The more volatile financial markets are, and the more uncertainty there is, the more strategic the role of the treasury will become in everything from mergers and acquisitions to raising long-term funding, from costing your product to ensuring that the company stays afloat.

Partnerships in Africa

As a bank operating in Africa - Barclays has a presence in 12 African countries – we therefore face specific challenges as well as the issues facing all global banks. At the moment, across Africa there is a very high degree of currency volatility and there are shortages of hard currency globally given what’s happening in Europe and China. That in turn has caused a lot of risk aversion. When doing business across Africa you don’t have the same luxury of currency liquidity, of certainty, of narrow spreads. Ghana has had to deal with currency depreciation, in Tanzania there’s a shortage both of hard currency and local currency because of high reserve requirements for local banks, there are specific issues in Nigeria given oil prices (that’s a country that where we are expanding our presence).

Another challenge we have in Africa is inconsistency of regulations, with differences in how regulators handle markets. Some central banks might be quite erratic in their policy decisions, which doesn’t help settle financial markets. You can have a lot of volatility in forex and interest rates, and then because of illiquidity you can’t access the right currency at the right time, be it for lending or hedging. And that can make it very difficult to operate for those lacking local experience.

In frontier markets it’s much less about price than it is about actually being able to do a transaction. There isn’t just one price. If you want to buy $100,000 or $1m your liquidity supply and your price around that might be vastly different, simply because of the different banks’ positions, because of the cycle and what is happening in that particular market. It is more to do with the partnership which will give the comfort of consistency and transparency as opposed to a law of one price, which simply doesn’t exist in our frontier markets.

As a bank, our role is to be really close to our chosen clients in all of our markets.

Despite the volatility and shortage of hard currency, we advise clients to partner with bank counterparts and look through the cycles because business goes on. That is what we are seeing. As a bank, our role is to be really close to our chosen clients in all of our markets, giving them the benefit of what we see in the market and what we can source for them. That’s a lot more relevant in markets like Africa than in somewhere like Europe where markets are far more developed and efficient.

Partnerships are becoming increasingly important as changing business models impact banks and their clients. The traditional relationship between banks and corporate treasuries is that banks push particular products, and the treasury picks off the shelf the products that seem to make sense at the time. It’s becoming more and more about client centric partnerships, about encouraging the banks to become an effective part of the client’s ecosystem.[[[PAGE]]]

Technology drives and facilitates change

Changes affecting the banking system are impacting banks and their clients in all regions. Clients have had good experience in having banks with global presence being able to service their needs uniformly in many different countries. That’s a great business model, but increasing regulation means that it’s become very expensive to run a global bank. Bank business models are having to take that into account and that is why we have been putting a lot of focus on innovation, on doing things differently and in some cases doing things which are completely different to the traditional banking model. We have invested in a peer-to-peer lending company, and we are investing in technology which we think will make foreign exchange more accessible and cheaper to more people. We are positioning ourselves in a changing business model.

Technological advances have been a major facilitator of the change that banks are going through. There is a huge amount of innovation, and treasury functions are becoming more efficient, more transparent and less risky. We have systems that allow companies to look at their cash balances across countries and have real control over something digitally which might previously have been done manually. We have rolled out one trading system across all our countries, so irrespective of whether your transactions are in foreign exchange, the money market or interest rates, it can all be measured centrally and it’s the same system in every market.

Technology will have an increasing and very real impact over the next few years because these things tend to be exponential. It’s not about small changes in technology, it’s about complete changes in business models.

There are certain financial services that you pay for today which should be free very soon. There are certain things that clients rely on banks for, although there’s no reason why they shouldn’t do it themselves or between themselves – an example is peer-to-peer lending. And banks may well move away from charging for cash management to charging for the use of our systems which we spend millions developing. Like any company you have to find something that people have a need for, and charge for that because your traditional income lines simply won’t be relevant any more.

Some banks are becoming more flexible, more nimble, more focused on being client centric and more about partnerships than specific product offerings. Corporate treasuries need to be open to this approach, to see their banks not as providers of products that have a price, but as partners.

Regulation has forced banks to change. Technology has both enabled and spurred that change. Innovation brings new ideas and new ways of doing things. It’s a new world not only for banks, but for all treasurers.