Cash & Liquidity Management

Through the Looking Glass: How to Manage Liquidity in 2016 Thanks to ongoing suppressed lending appetites and low interest rates, people have been discussing Ďthe new normalí since the financial crisis. But not only have these circumstances persisted, they have been exacerbated by further developments.

Through the Looking Glass:
How to Manage Liquidity in 2016

by Lisa Rossi, Global Head of Liquidity and Investment Product Development, Deutsche Bank

Lisa RossiThanks to ongoing suppressed lending appetites and low interest rates, people have been discussing ‘the new normal’ since the financial crisis. But not only have these circumstances persisted, they have been exacerbated by further developments – from an increasingly heavy regulatory burden for banks, to negative interest rates and the consequences of monetary policies. This paradigm shift means that now is the time to review liquidity management strategies and consider how they can be optimised.

No longer is this merely a desirable objective; circumstances have now made it a fundamental. Indeed, we’ve become accustomed to hearing the problems of scarce (and costly) liquidity. But for those corporates with excess liquidity, the implications of today’s environment are just as grave.

Adapting to continuing developments

This year brings a set of important compliance deadlines that will (directly and indirectly) be the main driver for treasurers’ careful analysis and improvement of their liquidity management. Above all, recent years have transformed corporate-bank relationships beyond recognition. What was once a simple buyer-seller relationship has become a much closer partnership, and corporates struggling with the liquidity environment must first understand the market factors behind it.

Previously, banks were able to leverage end-of-day liquidity to maximise returns for corporates with extra cash, but regulations around operational risk and liquidity are altering the way in which banks classify, report on, and balance liquidity and deposits. Tightening rules around non-operational deposits, leverage ratios and other balance-sheet factors ultimately mean that overnight deposits not attributed to operational flows are not as valuable as operational balances. At the same time the cost of credit is also rising, with both trends compounded by negative interest rates in Europe and other regions.

A recent Deutsche Bank-sponsored report from the Economist Intelligence Unit found that 40% of corporates have ‘fair amounts’ of excess cash and an additional 40% have ‘large amounts’ of cash. The reasons behind these cash hoards vary, from uncertainty around investment opportunities to buffers against unforeseen liquidity requirements – but regardless of the cause, these cash reserves need to be carefully managed to ensure that, beyond making little or no returns, they are not resulting in losses or costs for the corporate.

Liquidity management as portfolio management

Avoiding losses around deposits is only one aspect of liquidity optimisation. For all corporates, but particularly those tight on liquidity, a dashboard of different solutions can help, from improving visibility and cash flow forecasting, to centralisation or cash-concentration tools and internal sources of funding such as supply chain financing. But a significant shift in approach is needed for those with reserves, as traditional deployment opportunities are increasingly unattractive and deposits carry a risk of scenario loss.

Treasurers must first acknowledge the market circumstances and those of their banking partner. After assessing their current liquidity set-up – including global visibility from FX payments and subsidiary flows to existing investments – they must leverage portfolio management techniques, even for operating cash and current accounts. This can be achieved by utilising scenario-building to identify where and how their cash reserves are best employed – whether redeployed through dividends, acquisitions or R&D, or invested to reflect their appetite for risk diversification, maturity and yield.

Finding your way with the right tools

In order to negotiate the challenging circumstances and regulatory complexity of today’s liquidity situation, corporates should turn to their banking provider to support their internal analysis and improvement efforts. Banks are working to improve visibility and granularity and, beyond a merely operational role, should offer strategic advice and a one-stop platform through which clients can make customised investments to suit their needs. This should offer a full suite of investment products, including both on- and off-balance sheet and both active and passive options.

Corporates and banks can and should continue to negotiate ‘the new normal’, even beyond this year’s further regulatory deadlines and their direct and indirect consequences. But on both sides, a broader and deeper understanding than before of each other’s circumstances, needs and pain-points should help them to manage the financial landscape strategically and advantageously. Treasurers can no longer put off looking at the wider picture and new ways in which to manage their liquidity – ways that should prove beneficial for both corporates and their banking partners, and that make the most of the viable liquidity solutions on offer today.

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