Cash & Liquidity Management
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What Matters Today – #4 Creating a Sustainable Liquidity Strategy

#4: Creating a Sustainable Liquidity Strategy

by Tristan Attenborough, Managing Director, Liquidity & Investment Products Executive, EMEA and Margaret Yao, Managing Director, Asia Pacific Head of Liquidity Management & Investment Products, J.P. Morgan Treasury & Securities Services

During this series of articles, J.P. Morgan has explored some of the priorities for corporate treasurers that have emerged since the financial crisis. Many of these, such as risk management, the need for efficiency and the value of bank relationships, are not new but have been given greater priority as the markets have become more constrained. In this article, we look at another issue which, while a universal theme for treasury, has become far more compelling: liquidity management. While it has always been a priority for every treasurer, a new set of concerns has arisen, coupled with an increased focus from the CFO and the board. Here we will explore these concerns  and how treasurers, in partnership with their banking partners, are responding.

Changes to the liquidity landscape

Before the crisis, corporations pushed the risk-return spectrum in search of higher yields with some serious consequences.  In reaction, many organisations sought safe harbour in traditional, risk-free investments, became more focused on counterparty risk and on moving liquidity to well-capitalised banks. Capital preservation, risk management and ensuring access to liquidity and funding are the dominant themes, only re-emphasised by the debt crisis in Dubai.

Confidence amongst market participants in the interbank market is a major driver of credit availability.

Government and central bank intervention, both explicit and implicit, has changed the risk management picture considerably. Interest rate markets have become dislocated, with unprecedented low investment rates, while borrowing rates remain high. Some banks have changed their strategy or exited markets altogether, creating new banking risks for treasurers in addition to the repricing of credit. Weaknesses in the interest rate markets, contrasting with strong equity performance, create new questions for treasurers as to how cash should be invested.