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Cash & Liquidity Management
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Understanding the Liquidity Landscape

by Yera Hagopian, Global Head of Liquidity Solutions, Barclays

Liquidity management continues to be a fundamental aspect of the corporate treasurer’s role. Having cash in the right place at the right time has never been a more pressing concern. However, when companies decide to expand their group of cash management banks, there are inevitably consequences where liquidity management is concerned.

On the one hand, a multi-banking arrangement offers a number of benefits, such as enabling companies to diversify their risk exposures and focus on appointing the best bank for each country. On the other, this type of structure comes with a trade-off: companies adopting a multi-banking model are likely to sacrifice some of the simplicity and efficiency which can be achieved when working with a smaller group of banks.

Such companies will therefore need to work harder than ever to manage their liquidity as effectively as possible. As a result, there is a growing focus on gaining visibility over the company’s cash. First of all, however, treasurers must gain a thorough understanding of the liquidity landscape and the factors which are shaping it.

Liquidity trends

A number of drivers are affecting the liquidity management landscape at a global level. The first of these is the various regulatory changes currently in the pipeline, both at a global and a regional level. The most notable effect of these changes – particularly those associated with Basel III – are changing the way that banks think about their clients’ deposits. Deposits resulting directly from an operational relationship receive better treatment at the hands of the new regulations and are therefore considered more valuable than discretionary balances. Banks that provide transactional services have long known the value of stable funding from a robust cash management business, but for the corporate treasurer, the implications can present a dilemma. Now, the operational imperative to centralise and consolidate has to be weighed against the benefits of a more de-centralised structure that allocates operational business across a broader banking group. Other market factors are also influencing the way that corporates manage their liquidity. It is undeniable that a large amount of liquidity has come into the market in the last couple of years. Several factors have been driving this, such as quantitative easing in the UK and the US. While the Fed has begun to indicate that it may taper its quantitative easing programme, it is still pumping $85 billion into the economy each month. This, combined with the absence of any material economic uplift, has led to depressed yield curves and limited options for enhancing yield.