It is not news that the introduction of Basel III and market conditions has fundamentally changed the way corporates and banks interact. Nonetheless, it’s still a steep learning curve. This new paradigm requires that treasury managers reassess their views on best practices in managing banking relationships and RFPs.
And it’s a difficult balance because, well, it’s complicated, according to discussions at a spring meeting of The NeuGroup’s Global Cash and Banking Group (GCBG). Nowadays corporates have to fairly divide the treasury wallet, deal with frequent coverage changes – and inconsistent levels of coverage – all while managing the disparity between product and systems capabilities across banking partners.
And it’s not going to get easier as the complexity seems to increase exponentially by the year. Although most GCBG members have not changed their approach to bank relationship management after Basel III, they are feeling the effects in their relationships. Members agreed that they are experiencing consolidation of bank relationships, revising existing legal documentation and taking a second look at notional pooling structures, among other issues. In fact, 58% of members said that at least one bank had told them the value of their relationship had changed in the last three years and 33% terminated or significantly reduced a banking relationship due to lack of value to the bank over the same period. It’s not lost on both sides that the way banks value their client relationships has changed significantly.
This means treasury’s banking responsibilities are becoming ever more important as forces concurrent to Basel III (rules driving money market fund change, low or even negative interest rates) are pushing banks to accept and deploy capital much more selectively. This is resulting in more scrutiny about who banks do business with and how much business they do. Still, companies can maintain their cash management dignity by being selective right back.
In the short-term, 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. 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?
However things play out over the next several years with new rules kicking in – and who knows what other rules prudential regulators will dream up – the reality is that the changes in market environment are forcing corporates to look beyond themselves and become more familiar with the factors that impact the decisions of their banking partners. In this context, their principles might need to be expanded.