Selecting Your Liquidity Management Bank

Financial institutions have been hit hard by the credit crisis, and are concentrated on cleaning their balance sheets, securing their current assets and protecting the future business opportunities. The performance of the financial markets in 2008 and 2009 has required portfolio managers of all banks to re-evaluate their asset allocation strategies and the individual securities within their portfolios.

In the light of the current challenges and issues faced by banks, it is important to analyse how they are responding to the recent crisis, together with understanding the state of current practices adopted by their corporate clients and the biggest challenges to overcome when supporting the implementation of such practices.

Recent surveys among corporate respondents indicate that their organisations took at least one action as a direct result of the decline in short-term credit access during the month of September 2008 (Figure 1).

Until recently, when formulating their cash investment policies, most organisations looked to balance their desire for safety and liquidity with the need to generate a competitive return. In 2009, the focus shifted, because safety of principal has turned out to be the most important cash investment objective. Failing to manage liquidity properly can result in damage to reputation, if not insolvency.

Figure 1: Actions That Organisations Have Taken (or Expect to Take) as a Result of Reduced Access to Short-term Credit


Source: 2009 AFP Liquidity Survey

According to Celent’s view, liquidity, funding, and continuity of supply chain partners are high up on the treasurer and CFO agendas.

The current areas of corporate treasury focus are related to optimising existing cash pool systems, by improving relationships with banks, reviewing existing risk management processes, and improving straight-through processing (STP) and eliminating inefficiencies. Because of the damaging impact that the recession has had on their access to short-term credit, the majority of corporations have moved into ultra-safe investment vehicles, such as bank deposits, triple-A money market funds (MMFs) and treasury securities (Figure 2).

Figure 2: Permissible Investment Vehicles per Organisation’s Short-term Investment Policy in Addition to Bank Deposits


Source: 2009 AFP Liquidity Survey

These corporate cash investment policies are setting the agenda of banks when structuring the offering of treasury products and services. In addition, financial institutions must pay attention to the maximum maturity length and the minimum credit quality for each type of allowable investment vehicle opted by corporate policies.

Organisations now place most of their short-term investment portfolio into investment vehicles with very short maturities. On average, three-quarters of all short-term investment holdings are invested in vehicles with maturities of one month or less (source: AFP, October 2009).

State of Current Practices

To review and refine their structures and processes to free up as much liquidity as possible, corporations have adopted a number of liquidity management practices that have evolved over the past 12 months, combined with an increasing demand for transparency and control in all liquidity management solutions.

The first, and foremost, is an increase in the use of cash sweeping and the centralisation of company liquidity, combined with fewer mono-bank global liquidity management solutions.

An increased move from national to regional and multi-regional liquidity management models of transaction banking are a reality check for global banks. This is partly due to increased awareness of counterparty and concentration risk, as well as reduced bank lending. While keeping abreast with these evolving practices, global banks face also the challenge of meeting the standards set by regulators on a country-by-country basis, until there is better global regulatory coordination and alignment. It is clear that liquidity risk will be a large part of any future regulatory changes.

In response to the demanding requirements by corporate customers of liquidity, treasury products and services, major financial institutions are strengthening their offering in cash position reporting services, liquidity management infrastructure, sweeping and cash pooling services, investment services and liquidity management support.

Banks are fighting against competition in the battlefield of establishing global and local cash pooling platforms; in increasing/consolidating the number of locations where they can offer multi-currency pool header or master accounts; in the number of countries covered by intra-day sweeps; in the extension of the range of single and multi-country notional pooling services; in their ability to provide dedicated operational and customer support for liquidity management services.

In order to appreciate the current performance of banks in delivering liquidity, cash management and treasury services, we have scanned through the annual reports and websites of major international banks to get information on these lines of business. But most of the banks do not have liquidity, cash, and treasury management as separate reportable segments.

In the absence of the complete disclosure of cash management numbers, we have captured the results of the entire division that is engaged in the provision of cash, security, liquidity or treasury management services along with other banking services.

Figure 3: Ratio Between the Revenues of Cash, Security, Liquidity or Treasury Management Services and the Total Revenues of the Institution

Source: Celent

Revenue results in most cases do not show positive trends, especially in 2009. The most likely reason is that, while cash management services are widely offered by all major banks, corporate treasuries have been challenged by the troubled economy, and the constraints on capital flows in the financial markets urged the presence of banking partners that could do more than providing standard solutions for cash on deposit.

While large enterprises have benefited from the significant injection of liquidity backed by national governments, to the point that they can currently admit to be again cash-rich, mid-sized corporations still demand banks that tailor cash management solutions more closely to their needs.

In summary, cash-rich corporates have used their renewed levels of liquidity to proactively assist their strategic suppliers, practically disintermediating financial institutions. Smaller companies, on their side, have turned their backs to monolithic global banks to seek assistance from their local banking partner, in consideration of a longer, and more established, relationship. The combined effect of such a situation is that the revenues of banks for liquidity and cash provisioning have declined in the very recent past.

What Institutions Consider and Look Out For, in Response to Corporate Requirements

Liquidity, funding, and continuity of supply chain partners are high up on the treasurer’s and CFO’s agenda. The increased demand for more integrated cash management and trade solutions to address bottlenecks in the supply chain has suggested corporate treasuries to introduce performance indicators such as days sales outstanding (DSO), days payable outstanding (DPO), and other working capital ratios.

In addition, visibility into corporate cash accounts continues to be a major concern, as many of the world’s largest companies still cannot accurately forecast cash flow just two to three months out.

It is, therefore, a key priority to establish programmes that ensure company liquidity. Celent research finds the following are the areas of corporate treasury current focus:

• Optimise existing cash pool systems.
• Improve relationships with banks.
• Review existing risk management processes.
• Improve STP and standardise processes and procedures to eliminate inefficiencies.

Banks must use these guidelines to generate competitive differentiation. By combining relationship management with advisory services, they have the opportunity to add value through professional project implementation and support skills. The objective is to connect all single product portfolio solutions in one integrated package.

It is more critical than ever for corporates and banks to ensure that both are maximising the benefits of their relationship. Scrutiny of the cooperation tends to assess counterparty risk, which is a major role in evaluating all banking relationships, since the security of deposits is a key factor for business survival.

In the current economic turmoil, market conditions, and merger and acquisition (M&A)-intense activities, corporates look with interest at how consolidation programmes at their bank can lead to job cuts, therefore putting at risk the relationship team and lines of contact. Corporate treasurers look for a continuous contact with banks to get early signs of warning if things change and outline solutions in advance. Financial health of banking partners is being tracked with more diligence by corporate clients, as this goes in parallel with the control of the amount of money held and the correlated risk of keeping too much of it at one bank only.

Corporate decision makers will look at the bank’s commitment to the relationship, and its ability to provide an experienced project team that secures high-quality service delivery. The bank’s team technology capability and capacity must support the efficient and effective deployment of the IT platform, assisting also with system integration capacity for regionally-based infrastructures. At the same time, web technology initiatives with appropriate security, and the ability to offer solutions for cross-border cash concentration and pooling have become relevant criteria in a checklist. In view of these objectives, treasurers should select banks that show the ability to:

• Offer integrated visibility into cash accounts: understand what information is needed, and check the local clearing system to ensure it supports the requirement.
• Offer both domestic and cross-border liquidity management services that cover payment transfers, e-banking, and cash pooling facilities.
• Deliver solutions that address bottlenecks in the supply chain.
• Provide centralised payment processing centres; accept payment instructions in multiple formats (such as SWIFT, XML, or proprietary protocols) in the same file.
• Enable multiple payment types, such as local and foreign currency, domestic and cross-border payments, and single or bulk volumes. This is best done through an integrated solution that offers STP from the company’s accounting and accounts payable (A/P) and accounts receivable (A/R) modules directly to the bank’s systems.
• Combine relationship management with advisory services to add value through professional project implementation and support skills.
• Commit to clients that mergers will not lead to job cuts that put the relationship team and lines of contact at risk.
• Agree on data extraction and semantics standards to allow cross-platform data sharing and metadata enrichment. The leading example of this is extensible business reporting language (XBRL).
• Strike the proper balance between use of clients’ capital in the lending process and cash management revenue. Banks have to become smarter about how they look at risk and how it is priced.

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