BankingBanking Risk Management‘This is a supply chain crisis not a banking one’

‘This is a supply chain crisis not a banking one’

As market problems continue, treasurers need not concern themselves about their bank relationships, says strategist

Treasurers must focus on supply chain delivery and cash flow capabilities rather than worry about the state of their banks’ health, according to Bill Wrest, senior strategist at Gresham Technologies.

Wrest argues that despite frequent comparisons with the global financial crisis of 2007/08, the current market turmoil is quite different.

“It’s not necessarily ‘I’ve got 10 or 12 banks, they’re my relationship banks, am I concerned about their risk rating and how they are as a counterparty?’ Because if I compare it back to the previous bank crisis, I think it’s quite different. This is a corporate and company crisis based on supply chain delivery and cash flow considerations,” Wrest says.

“You’re seeing companies sadly having to furlough people to cut costs, because there isn’t enough working capital. There are breaks in the supply chain finance that make it impossible to continue on a day to day basis, airlines being the absolute case in point where their fundamental business was relying on supply chain, the consumer or on the institutional level, the need to travel. Shut that down and they have no income.”

Wrest points out that the various capital requirements regimes such as the Basel accords that banks have faced since the global financial crisis as a reassurance.

“I don’t think if I was sitting as a corporate treasurer, I’d actually be looking at the risk ratings of my counterparties particularly since the Basel regulations, post the bank crisis, have meant the banks have had to ramp up their capital provision against lending and various other criteria and are constantly stress tested to ensure they would stand up to another financial crisis,” he says.

As for what treasurers should be doing to manage the pandemic, Wrest argues that doing nothing is not an option.

“I don’t think doing nothing is the safe option,” he says. “Treasurers are now sitting at home, and they’ve probably become more strategic to the operation than they have ever been.

“Historically, the treasury role was quite operational. Look at the cash flow, monitor liquidity, look at reconciliation. Now, it’s become business critical in terms of maximising the return on working capital, projecting those cash flows and how long it’s going to last.

“Looking at what if scenarios, measuring the counterparty risk of their key clients, diversifying that client base as much as possible, because the bad example is if 80 percent of my revenue is coming from one client, which is a very bad but highlighting example, if that client is now suffering in this environment, then I’m at the same level of risk as they are.

The need for control and visibility is so urgent for treasurers, Wrest somewhat paradoxically believes now is the time to invest in treasury technology.

“If you were looking at improving liquidity solutions and looking at multi-bank connectivity and things like that, as a project, you would think it might be the time not to do that. And yet, there’s never been a more optimal time to look at the addressable gaps in treasury.”

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