By Anne Friberg and Bryan Richardson
At EuroFinance the mood reflected the Geneva weather in early October: OK for now but partly cloudy with a good chance of rain (read: lots of regs and a good chance for a double dip).
There was a cautious but optimistic mood among the 1800-plus delegates at EuroFinance’s 19th annual International Cash and Treasury Management conference. Echoing the issues International Treasurer has highlighted over the past several months, the feeling at the conference was that significant changes loom on the regulatory landscape and are casting a long shadow of uncertainty over how banks and corporations alike will navigate the future and their relationships with each other.
Against this backdrop, The Economist’s executive editor Daniel Franklin kicked off the conference, which took place in Geneva on October 6-8, with a 2011 outlook covering a range of predictions and pronouncements. The most important for treasurers were:
1) The big risk in 2011 will be policy risk. The reasons are threefold: (a) It is a delicate process stoking demand in the economy, and “coordinated austerity” in large economies—which has not yet kicked in—could tip the world into recession again; Mr. Franklin sees a 30 percent chance of a double dip in 2011 (the audience poll revealed that two-thirds of the voting participants thought the threat of a double-dip recession was “very” or “quite” significant, i.e., the chance of rain is high). This creates challenges for financial planning and cash-flow forecasting. (b) An expiry of the Bush tax cuts in the US in the absence of action by legislators will “cause problems.” (c) President Obama’s administration does not “get” business and the impact on it of regulatory uncertainty. Mr. Franklin emphasized that the Obama administration “needs to minimize this uncertainty,” referring to the impact of the new health care and Dodd-Frank financial reform laws, in addition to the lack of clarity about tax levels after 2010.
2) So, what will big business do in 2011? Big business will likely take a wait-and-see approach in the West and in the US particularly while uncertainty about recovery, regs and taxes reigns. But it will not sit on its hands. Recovery in the West might well lag but the global nature of business is becoming increasingly important and globalization is entering a new phase—for large MNCs it began a long time ago—where companies will put different parts of their business in different locations to take advantage of talent, product delivery, cost, etc. Such a shift changes the way treasury deals with issues ranging from FX and other risks, to cash management, how treasury is organized and where it’s located. Another aspect of global business is the increasing globalization of companies from emerging markets, often into other emerging markets where the growth is and the operating territory is more familiar.
3) Interest rates will remain low in Western countries, with exceptions for commodity-rich countries like Australia.
Regulation as “new religion”
The main session on the first day presented a panel consisting mainly of bankers and consultants along with Lufthansa’s treasurer Roland Kern. The panelists discussed the external forces challenging treasury in the near- to medium-term, with the most emphasis on the weight of the impact of the new regulatory environment, much of which is yet unclear.
“Regulation is the new religion,” said Marilyn Spearing, Deutsche Bank’s global head of trade finance and cash management, in reference to one of Mr. Franklin’s predictions (namely that there would be a new global religion emerging by 2035).
First and foremost, the Dodd-Frank financial reform package and Basel III will change the operating landscape for banks and corporates in the years to come. Corporate treasurers are understandably concerned with the new rules on OTC derivatives and how they will be affected by requirements for (a) central-clearing; (b) margin posting; and (c) trading disclosures.
Even if they are minimally affected by these because of end-user and possibly also FX exemptions, they worry that they will still be faced with increased costs of hedging because their trading counterparties will not be exempt from the clearing and margin rules.
Basel III capital requirements for banks (suggested by the Basel committee but enacted in part or completely by local regulators) will be phased in until 2018 and will increase banks’ cost of capital compared to now and especially compared to before the crisis when credit was cheap and leverage ratios high. Deutsche Bank’s Ms. Spearing remarked that lending will become more expensive for banks and the trend is away from banks being competitive on the liquidity side.
So with a move away from providing liquidity at the heart of the bank business model, and the regulatory implications on trade finance, leverage and how banks cover the liquidity they provide to corporates, “my core worry is that I don’t know what range of products and services I can offer to corporates,” she said.
Ann Boden, RBS’s Global Transaction Services head of EMEA, observed that the capital ratios in Basel III are three times the ones banks had before which will push up the price on bank lending. As a result, she said, “customers will find capital markets more attractive” for funding, and banks will come to value the “sticky” balances associated with corporates’ cash management operations.
The value of those balances will surely take center stage for treasurers in their negotiations with their banks going forward. As credit becomes more expensive to provide, bank relationships will become tighter, fewer and more strategic, and with more emphasis on cross-selling services (see “Banking Relationships to More Aggressively Court Share of Wallet,” iTreasurer.com, July 6, 2010). Corporates realize this, but in the wake of the financial crisis they’re not ready to tie themselves too closely to just a few banks.
This was key the takeaway from a later practitioner discussion on better banking strategies. As we have noted before, the trend for corporates to take charge of both the connections with their banks and the messaging via bank-agnostic SWIFT initiatives became more pronounced as they dealt with counterparty risk during of the financial crisis (spread the risk of having big deposits with too few banks).
Gary Bischoping, treasurer of Dell (a SWIFT convert), observed that the company had reduced the proportion of cash held with its top ten banks from 98 to 70 percent, and getting visibility and the ability to shift banks rapidly if necessary “necessitates a technology platform that enables that.”
If the conference themes demonstrated anything, it was that regulatory ambiguity and uncertainty about the economy remains a challenge for treasury; but there is no excuse for doing nothing, which was borne out in several sessions.
On a variety of topics, such as alternative funding (agency deals, private placement) and investments (is your money-market fund really what it says in the ingredients?), practitioners drilled into the details of their activities in search of the incremental improvements that bring treasury forward.