Credit Crunch: Impact on Corporates
I recently attended an international payments conference in London and I wanted to share a number of concerns I have, both as a citizen and as corporate treasurers, based on some of the discussions and comments I heard there.
First, there was a very good presentation by an economist on the consequences of the sub-prime banking crisis. “This is not a light-hearted topic, but we will get over it, all the more so as the payments industry is at last getting a chance to prove that it works profitably without creating major risks. But banks have to comply with ever more prudential rules, which costs us a lot of money,” the speaker said. “And then just look at the single euro payments area [SEPA], this political initiative which prevents us, the banks, from applying competitive rates to payments in Europe.”
However, what this eminent person forgot to mention is that we will get over it thanks to the generous gift of taxpayers who, once again, will pick up the bill for an increasingly aggressive banking industry in quest of short-term profits. When the Italian government grants Alitalia a loan of €300m to avoid bankruptcy, there is a general outcry – and rightly so – about state aid. The UK government, the main proponent of free competition and non-regulation, nationalises Northern Rock and floods the market with £50bn to rescue the sector, and not one single voice is heard, no questions are asked – amazing, isn’t it?
There is something else the speaker omitted to say: SEPA came into being because the banking industry refused to modernise its payment systems and instruments and to work towards standardisation. Self-regulation does not apply to a sector where states have no choice but to step in with public money to avoid knock-on effects.
I hardly dare imagine what this debacle might have triggered had there not been a highly stringent prudential framework. UK taxpayers would surely have wanted it to be even stricter, as they would rather see their country invest in better hospitals or improve the fate of less fortunate members of society rather than compensate banks for their bad loans.
Do we have to recall that the main economic function of a universal bank is to redistribute retail saving deposits to companies and consumers, not to use them for speculative purposes?
At a more technical level, the presentation failed to point out that the health of the bank a company is working with is crucial for the company as well. Just consider the number of SMEs who end in dire straits because banks won’t grant them credit or only at prohibitive rates because of their own liquidity problems. Large corporates are generally better off. But put yourself in the position of a corporate treasurer who has built his entire international cash management system with a large global bank whose rating is at risk of suddenly taking a plunge as a consequence of this debacle.
As payment systems are not standardised, we know that in such a situation switching from one bank to another one is impossible. It would take the treasurer several months to assemble an efficient cash pooling structure with another partner. But the treasury policy and the board’s guidelines for the treasurer stipulate that he is not authorised to deposit surplus liquidity with a bank that has a less than solid rating. This is a considerable risk the company might not have considered; in the best- case scenario, it might have spotted it but given precedence to the ‘cost’ element rather than the risk management based approach. It is probably cheaper to deal with one single global bank. But in finance, as in life generally, there is no such thing as a free lunch.
I thought I’d heard enough, but no. A little later, another no less eminent banker bluntly said that standardising payments was certainly not the right way forward, as highly powerful and technologically up-to-date format converters are available to everyone. What he was actually saying was ‘just do your payments as you did in the past, we’ll take care of everything else’. Following this line of thought, the same banker openly wondered whether we really needed SWIFT. I must have been dreaming!
Fortunately my friend, the chairman of the European Payments Council (EPC) was not in the room, or he would have fallen off his chair! Maybe he wisely decided not to be present at this point in the discussion. Colleagues from SWIFT are used to a lot of comments but that just about beats it! Why did these supporters of converters not speak up four or five years ago…before the banking sector was forced to work hard on standards (without consulting the users, by the way, on the pretext that it was an internal banking affair), leading to the current situation which nobody is enthusiastic about, quite obviously.
Although I belong the group that think that the SEPA Credit Transfer is likely to become the standard (even if not all promises to corporates have been kept by the EPC), we must realise that the SEPA Direct Debit in its present form is being rejected by virtually everyone (albeit for very different reasons according to country and sector, admittedly).
What a waste of energy! But all this is due to the fact that self-regulation in the banking sector is simply not working. I am certainly not a proponent of over-regulation, and this is grossly unfair to those banks that have been circumspect and managed their affairs well, and there are some. I do think, however, that it is particularly misplaced to moan about the power supervisory bodies exert over banks at this juncture: there is no free lunch for bad bank managers either. Corporate treasurers will have to be even more vigilant in the future.