Banks and Corporates Forging Deeper Relationships

By Ted Howard

Under the shadow of regulations and low interest rates, banks and corporates are looking for “more meaningful” (read: worth it) relationships.  

“It’s not you, it’s me.” It’s a classic breakup line for relationships that one side wants out of. And it may just be what you hear from banks when it comes time to attend to your cash and credit needs. From deposits to lending to notional pooling and other areas, banks are getting more selective and getting out of relationships that don’t deliver. Why? Regulations mainly and in some cases low interest rates.

This means treasury’s banking responsibilities are becoming ever more important as new capital requirements from Basel III, money market fund reform and low- or even negative interest rates force banks to accept and deploy capital much more selectively, resulting in more scrutiny about whom they do business with and how much business they do.

Still, companies can maintain their cash management dignity by being just as selective. This they can do by maintaining bank scorecards and share-of-wallet reviews and using those processes to drive decisions when bank groups need to be downsized or increased (see sidebar, page 3). But both sides can make an effort to make the relationship work.

“Clients understand the impact [of recent regulations] and are willing to work with banks to mitigate the costs involved,” says Suzanne Janse van Rensburg, regional head of liquidity and investments, global transaction services for Europe, the Middle East and Africa (EMEA) at Bank of America Merrill Lynch.

LCR: C U Later?

Basel III is having a particular impact on bank product offerings. Take notional pooling for instance, which some banks are reportedly considering dropping from their product offering list.

Basel III’s Liquidity Coverage Ratio (LCR) has thrown banks into confusion about which types of deposits they want to accept. While notional pooling structures offered by banks (and their underlying operational deposit accounts) have so far survived the LCR rules, they are still going to be tested by the Net Stable Funding Ratio (NSFR) rule and other ongoing bank regulation interpretations in jurisdictions around the world. Additionally, they’ll encounter various forms of ring fencing to prevent too much liquidity from escaping across borders. These will make notional pooling structures, and especially the cross-border variety, more costly for banks to provide with time.

“At the moment, the full impact [of Basel III] is still unknown,” says Ron Kors, manager, clients & products and executive vice president at Bank Mendes Gans in Amsterdam. “What we experienced in the market is that there are a lot of rumors, but the truth is that Basel III does not explicitly talk about notional pooling and we are still in discussions with the regulators about the details.” He added that BMG’s aim is to continue with its products and services. “However, we have to include the possible consequences—increased capital and related costs—in our offering.”

Some treasurers have by now experienced banks’ turning away their cash when it is too sizable for their banks to manage under new liquidity requirements, or paying more for cash in jurisdictions where they need liquidity (often in higher-yielding currencies where it is more difficult to pool). The question is: Will notional pooling structures be able to adapt to support these sorts of push-me, pull-you regulatory dynamics effectively?

Under these circumstances, banks are less interested in the now-less-profitable cash management business and managing it in the context of a larger business relationship with the client. According to The Corporate Treasurer, HSBC, Standard Chartered and Deutsche Bank are shifting away from “pushing notional pooling to their clients,” citing the cost and the rules. As this happens, companies are realizing that means more costs for them.

“For a long time the perception in the market was that [LCR] was a bank priority,” says Ms. Janse van Rensburg. “But in last the 12-18 months corporates have realized there is a downstream impact on them.”

Already on the outs?

So Basel III could spell the end of notional pooling for some banks, which in any case has long been a challenge because, according to a Treasury Alliance Group white paper, “Cash Pooling: Improving the Balance Sheet,” it is “unpopular with some regulators, raises tax concerns with others and is often opaque from a cost standpoint to potential users.”

To survive, many structures, even down to simple deposit accounts, will need to be re-characterized to fit the new regulatory edicts. According to BofAML’s Ms. Janse van Rensburg, some banks in Europe are “struggling to make these pooling arrangements work from an economic point of view.” Banks are exiting some products until they figure out how they are impacted by regulations.

“Future proofing means, from a regulatory standpoint, the product complies rigorously with reporting and accounting rules,” Ms. Janse van Rensburg said. “As long as you have the right elements to underpin your offering in place there is no threat to the product,” she says. However, she adds, there are different costs for different structures and some banks may have to pull out of particular pools for certain clients, for example, those that aren’t investment grade.

“Some banks are ‘re-papering’ [writing new contracts] and re-pricing and as a result, several have pulled some pooling products together,” Ms. Janse van Rensburg says. Particularly interest-optimization type pooling arrangements; these, she says, are “more costly to offer. Hence we are seeing some banks re-structuring those products.”

Treasurer’s Challenge

So with banks in a selective mood, it falls to treasurers to figure out the best approach to staying high on the selective list. Therefore, knowing a bank’s level of commitment is critical when assigning business—as long as the price is right.

“In general we expect that the options for treasurers will become limited as some providers might exit this product,” BMG’s Mr. Kors says. However, “it depends on the specific situation of the bank if either the LR, the LCR or both is a problem. The full impact can only be seen in a couple of years when the implementation of Basel III is finalized. Until then we expectthat banks will become more selective in accepting new clients and with restrictions in size.”

At a recent NeuGroup Global Cash and Banking Group (GCBG) meeting, members discussed approaches to managing the bank relationship most efficiently. Members suggested that the length of a relationship and strength of support, in good times and bad, are the first things corporates look at when deciding how to fairly split their business among their banks. However, regardless of the many different techniques corporates use to quantify and ensure a fair share of wallet, if a bank does not have the right capabilities at the right price, all bets are off in this very cost- and efficiency-driven environment.

Another suggestion: think like a banker—put yourself in your bank’s shoes for a little while and try to figure out what they want. Although a difficult exercise, it is interesting to try to understand the value that you bring as a client to your banking partners beyond calculating a share-of-wallet. It helps to understand when a business is becoming too unprofitable for your bank or when a credit commitment is too high, so you can strategize about bringing in a replacement and what to do next. It is especially critical when banks are being choosy about which companies to work with.

Corporates must take measures to deal with a situation that is expected to last. However, it is critical to also understand where your bank is coming from to improve your negotiating position and achieve a mutually accommodating solution. In the short term, some recommendations are to improve cash-forecasting capabilities, implement cash structures to reduce idle cash and look at alternative investments.

“In general we expect that the options for treasurers will become limited as some providers might exit this product; it depends on the specific situation of the bank if either the LR, the LCR or both is a problem.
— BMG’s Ron Kors 

It is also recommended to revisit the share-of-wallet approach and investment policies to keep up with the current market environment. Long term, corporates should reevaluate their liquidity structure and banking partners. Under the new paradigm and anticipated changes in tax regulations, is your liquidity structure still the best fit? And, as banks look to streamline relationships, will you still have some negotiating power with your current bank group or do you need to reshuffle too?

Rainy day prep

Finally, be prepared when times are tough. In other words, no one loves you when you’re down, so it is in the not-so-good times that you’ll quickly learn who your real friends are. If your business is booming and your share is going up, banks will be lining up at your door. It is when things are not going your way or are just more stable that you know which banking partners are really committed to working with you.

Bank relationship management has been a hot topic and on nearly every treasury priority list for decades. But given the major shift in regulatory requirements and low interest rates that will ultimately impact credit availability and bank fees, it will continue to be an area that requires heightened attention in the coming years. With banks already focusing on their strategic clients at the expense of those clients who are not considered strategic, it will require treasury to ensure it is keeping the right banks and keeping those banks happy.