Cash & Liquidity ManagementCash ManagementReducing Risk: Three Key Areas for Treasury

Reducing Risk: Three Key Areas for Treasury

You don’t have to delve too far into history to be reminded of one of the bleakest examples of worst-case scenarios. The financial crisis, which began in 2007 and from which we are still feeling the effects, ensured that many of the world’s corporates, financial institutions and country economies reeled from its aftershocks.

Prior to the crisis, there was little or no impetus for extensive contingency planning. There were established, well-trodden paths of how corporate treasurers and banks worked, with evolution primarily driven around technology, the industry and globalisation.

The financial crisis however, marked a watershed in the way that corporate treasurers and their banks embarked on their business. Moreover, the magnitude of its fall-out provided the impetus for the financial world to recognise the negative potential of scenarios and to put in place mechanisms to prevent history from repeating itself.

Much has been written about the dramatically-changed life of the post-crisis corporate treasurer, with today’s operating environment defined by greater volatility and unpredictability than pre-2007. Indeed, an interesting anecdote heard recently was that since the collapse of Lehman Brothers at the height of the crisis, an interest rate change has occurred somewhere on the planet every three working days. This alone provides corporates with a huge dilemma in terms of how they manage their cash around the world to accommodate these fluctuations, as well as how they hedge against currencies and manage counterparty, credit and sovereign risk.

Such fluctuations also have a substantial impact on banks in terms of dictating their appetite for certain currencies, their longer term planning, their preparedness to support markets and the extent to which they are able to finance and service their corporate clients. This has presented a perfect storm for both banks and corporates; in some cases driven by each other, but also driven by their independent roles and requirements.

For example, the regulatory landscape has provided the catalyst for some of the greatest changes ever witnessed across the banking spectrum. From investment banking to asset management and transaction services, all have been impacted by the new swathe of rules designed to create and support a more robust financial environment. Although Basel regulation existed long before the crisis, the concept that banks would have greater plans around their long term liquidity and sustainability, and their ability to absorb risk was only heightened by the events of 2007-08.

Growing Demands

There are numerous examples, which appear in the news with alarming regularity, regarding ongoing political or socio economic issues impacting the business agenda. The pace of change is accelerating, rather than decreasing.

As corporate treasuries grapple with the daily strain of operating in a permanently changing world more exposed to risk than ever before, there is a growing sense that managing the repercussions of such change comprises an ever-increasing portion of their agenda. While they have traditionally focused on supporting business growth, corporate treasurers must now prioritise their work to find ways to insulate their companies from increased risk.

In the first few months of this year, there was a notable spike in merger and acquisition (M&A) activity, for example. A change in treasury appetite such as this is fuelling greater consideration of new strategies that can be adopted by corporates looking for different ways to use their cash. This shift has prompted much debate around the ability of an acquisition to help realise a company’s key strategic imperative rather than trying to grow organically, or to provide a better return on capital over placing funds in a bank account.

From Bank of America Merrill Lynch’s perspective, conversations with clients have increased exponentially over recent years across our broad global banking platform. Often, they want to hear how other companies have been helped in similar situations, particularly around expansion plans into unchartered territory. In this instance, where there must be greater consideration of increased risk and regulatory concerns, the treasurer is seeking more innovative and creative solutions than in the past.

It is also important to recognise the essential role played by technology, where the rate of enhancement over recent years is aiding the evolution of treasury’s end-to-end focus across the entire company. Keeping abreast of this pace of change is a challenge in itself in understanding how technological advancements can aid the visibility of a treasurer.

The opportunity for clients to interact with each other can also open up constructive dialogue to plug into each other’s experiences. For example, our compliance teams are currently some of the most in demand people at the bank because they can help clients with activities and dilemmas they have never handled previously. Leveraging another party’s experience can often provide more insight and guidance than a client trying to judge the unknown in a silo.

Three Key Areas

On the topic of such collaborative efforts, there are three areas we have identified where corporates and banks should focus their efforts:

  1. Visibility: It is now the prerequisite of a corporate treasurer to both manage and respond to risk. Without knowing the location of cash, liquidity positions and the impact of changing market circumstances, corporate treasurers can be powerless to react. Furthermore, knowledge of current technological innovations that can help manage risk is key.
  2. Options: A good understanding of all available options is imperative. Take foreign exchange (FX) for example: given regular fluctuations in currency positions, impacts on cost base, influences on investment considerations and M&A strategies, FX today can make or break a business.
  3. Reaction: How corporates and their banks plan in the face of different market dynamics and adjust business strategies when necessary, lies in the approach they adopt for each and every market, the providers they select and the scenario contingency planning across each of the territories where they do business. The ability to react at speed to help protect your business when numerous circumstances have changed against plan is of paramount importance.

As a corporate treasurer, clearly defined plans with relevant controls are critical to assessing risk. This is forcing both corporates and banks to evaluate the type of providers they work with. Consequently, questions around the combination of providers regarding scale, service offering and long-term investment across each of the markets where a company does business must all be assessed.

The options can range from a light-touch provider, who literally supplies the plumbing around banking services, through to an end-to-end banking provider who can handle the whole gambit of banking services. This extension of services can include advisory, bond issuance, support around M&A activity or underwriting of funding solutions. This in itself can dictate the range of corporate treasury activities undertaken with the provider bank.

So is it possible to learn lessons from history? Ultimately, it is essential that companies recognise the broadened remit and integral role treasury teams have by arming them with the resources, the visibility and the access to perform their role and ensure their function is “fit for purpose”. Working through scenarios and matching them against the company’s risk controls is helping to mitigate history repeating itself.

Crucially, the critical issues treasurers have to deal with today, underlined by their contribution to navigating their company’ risk landscape is one such lesson. The treasurer’s role to safeguard their company from risk and its many pitfalls is paramount to ensure the only scenarios they ever have to contend with are those which secure the growth and prosperity of their organisation.

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