BankingCorporate to Bank RelationshipsHow Banks Invest To Support Corporate Treasury

How Banks Invest To Support Corporate Treasury

I have nothing but the greatest respect for corporate treasurers, not only because they take a tough job upon themselves with heavy responsibilities but also because of the key role that they play within the wider economy. Treasury is the beating heart of any corporation and the corporation is the basic unit of our economic system. Without the treasurer’s guiding hand, corporations would be far riskier economic actors, far more prone to partial and total failure. Global business is therefore not only supported by the treasurer’s role – it is facilitated, enhanced and boosted by it. Without the treasurer’s remorseless quest to squeeze every basis point of return out of the firm’s liquid assets, we would not have efficient financial markets. The same goes for the treasurer’s clear-eyed strategies to manage the firm’s financial risks. Well functioning financial markets are made up of savvy players with good information who are able to act in the blink of an eye with low transaction costs. The treasury profession has come a long way in the past decade and we should tip our hats to the tough, hyper sophisticated band of treasury professionals who tend to the financial welfare of their own firms and in so doing contribute to the health of our vibrant, flexible and growing economic system.

As financial intermediaries, it is beholden on banks to make the treasurer’s job easier. We need to provide the conditions for corporate health well beyond the traditional role of giving a safe haven for deposits and providing credit. Certainly, we must keep pace with the direction in which the treasury community wants to go and act fast when conditions change, or risk becoming more of a hindrance than a help. It is this mindset that drives Citigroup’s my institution’s investment decisions and the same can be said for the wider banking community. In this article I want to give the treasurer some insight into how banks invest to support corporate treasury. With greater mutual understanding we can work together to make sure that corporate treasury imperatives and the development of banking system capabilities are tied together in lock-step.

The Infrastructure

Let’s begin with an overview of the infrastructural territory, the basic machinery of the financial system. Banks provide much of the plumbing for – and are principal actors in – the core foreign exchange, equity and debt capital markets. We have created global infrastructures such as SWIFT (recently upgraded to a real time, IP based network) to support the work of these markets, allowing participants to transact with each other very rapidly in highly automated ways. We have dematerialised securities in many countries. We have come together as a community of commercial banks to eliminate settlement risk from foreign exchange trading through the creation of CLS, a key measure to safeguard banks and by extension the assets of their clients. On a national level, we have created ACH and RTGS systems to facilitate super efficient processing of domestic payments, progressively driving paper out of the system.

Banks spend an enormous amount of money in the development and upkeep of the financial infrastructure. A recent Tower Group survey said that IT spending by banks will reach $361bn in 2005 (growing to $450bn by 2010). That is an enormous number and one would expect to see the industry taking significant strides forward with that kind of investment behind it. It is important to think about what the money is being spent on – over half of that figure goes to maintenance of legacy systems. They may not be sexy, but they do the heavy lifting for the banking system. Still, $150bn or so on new tools gear should go a long way, shouldn’t it? It does, but given the times we live in, a fair chunk of the money is being invested in systems to meet new compliance and regulatory demands. Money laundering detection systems, software to interdict terrorist funds, new systems to cope with Basel II and new interfaces to new clearing infrastructures such as Target 2. These are all very significant investments and are aimed at providing a better risk management and operating infrastructure to the clients.

It is the discretionary spend left over after we have done all of the maintenance, regulatory and compliance work that we need to be very conscious about using wisely to meet evolving client needs. These are still significant resources so let me give you an insight into some of the spending priorities of Citigroup.

Interoperable Systems

We hear loud and clear the call from corporate treasury to work with more open and interoperable systems, so we are investing in initiatives like TWIST and actively promote the usage and continued development of MA-CUGs. We recognise that we are moving away from the age of proprietary systems that lock clients in through the inconvenience of changing from one bank to another, towards an age of open, common solutions to common problems.

We see cash flow forecasting as one of the great unsolved problems of corporate treasury – a problem that is tied to the more general need for the treasurer to know his or her positions in real time and be able to transact quickly in response to changing circumstances. So we are developing the next generation of data aggregation and analysis tools for use in complex treasury environments. Critically, we are developing these hand-in-hand with sophisticated corporate treasury clients and using expertise from Microsoft to bring the very latest technology to bear on the problem.

As the burdens on corporate treasury increase it becomes hard for some firms to maintain state of the art systems and processes. That is why we invest so heavily in our treasury outsourcing facility in Dublin – to give those firms that want it, the ability to use a pooled, best-in-class resource either as an adjunct to their own treasury operation or as a fully-fledged factory for day-to-day treasury tasks. We see this as an increasingly important part of our product portfolio going forward – one that will reach out to new areas in the future.

We allocate significant investment dollars to find ways to mine the working capital cycle for further efficiencies. There is still a huge untapped potential here, as studies from REL Consultancy Group continue to show. In particular, we are interested in the tighter integration of the physical supply chain with the financial supply chain. To provide solutions across the entire working capital cycle and financial supply chain, banks do have to tear down internal organisational and technological silos. I am reminded of a comment from one treasurer who noted that due to the way they are organised, banks can be like orchestras where each player makes perfectly good music, but it has nothing to do with what the person next to him is playing. It is the corporate treasurer who hears the music from all of the different business units in the bank, and often it can be a discordant mess. Banks do have to orchestrate their activities much better against customer supply chains and take their lead from the corporate treasurer.

Conclusion

The corporate treasurer has a mighty task, a serious responsibility to his or her firm and by a very short step (that they may or not think about) to the efficient working of the wider economy. Banks seek to provide the financial infrastructure to enable the corporate treasurer to manage the firm’s short to medium term financial positions and risks. Part of our investment is in the hidden financial infrastructure that makes the global economy tick. Part of it is absorbed by growing regulatory and compliance requirements, many of which are leading to a safer, more robust financial system, some of which are merely due to national differences in ways of doing things. The substantial remainder is where treasurers and bankers need to work closely together to make sure we get the biggest bang for the buck. It is a mutual responsibility we share to understand one another, deepen our relationships and drive together the next wave of treasury innovation.

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