The latest topics International Treasurer is investigating.
As this turbulent decade limps to an end, there remain plenty of unknown unknowns that require continued vigilance. In particular, treasurers are taking pains to secure their liquidity needs. Some are prefunding in the rallying capital markets, thereby lowering their exposure to the banking sector. That seems wise, since it is still deleveraging, reliant on net interest margin (and some prop trading) facilitated by the government-contrived yield curve arbitrage, and lumbered with difficult-to-quantify exposure to deteriorating sovereign debt and other assets.
Treasury’s concerns at the opening of this new decade contrast sharply with those at the start of the last. On the regulatory front, the new millennium started off with a heated debate over the regulation of over-the-counter derivatives, and a consensus emerged that the market should be left to its own devices. That decision was enshrined in the Commodity Futures Modernization Act of 2000, passed late in that year. By contrast, this decade kicks off with a debate over a far-reaching legislative effort to rein in the OTC market and its participants.
Another big reversal is possible on the hedge accounting front. There was enormous confusion and dismay among corporate treasurers over the FAS 133 and IAS 39 accounting rules being proposed ten years ago. Now, some companies are discussing whether they should abandon hedge accounting—securities analysts largely ignore it anyway—and standard-setters on both sides of the Atlantic are reconsidering their rules.
Yet another tectonic change has occurred in realm of bank relationships. At the opening of the millennium, the credit derivatives market was still tiny. But banks—led by pre-merger JPMorgan—had developed the analytical acumen to realize that on a risk-adjusted basis, most forms of corporate lending were not profitable. Hence their embrace of credit derivatives, which allowed them to shift risk off their books and onto the hands of (what turned out later to be rather hapless) investors through synthetic CDOs and CLOs, without alerting their corporate clients that they no longer had skin in the game.
This was the genesis of the originate-and-distribute model that allowed credit standards to plunge, igniting and fanning the recent crisis. Now, the shadow banking system that absorbed all that credit risk is in ruins, banks are being told to shrink their assets and boost their capital, and companies have lost confidence in many of their counterparties. In a way, treasurers looking to rationalize and strengthen their banking relationships in this environment have to turn the clock back some ten years.