In shadow of crisis, The NeuGroup’s European Treasurers’ Peer Group determines that risk management is job 1, 2 and 3. 
Just as the Greek drama was heating up again in a big way, The NeuGroup’s European Treasurers’ Peer Group (EuroTPG) convened for its spring 2012 meeting, hosted by ABB in Zürich and sponsored by Bank of America Merrill Lynch’s EMEA GTS team (the other drama was the 60-meter move of a historic building just outside the window on the day of the meeting).
As is custom to put the meeting in context, it began with a round of introductions; participants laid out their main concerns, priorities and current projects. This led naturally to a session on the biggest concern, namely the euro situation, and an update on the EU economies by Bank of America’s Chief Economist Dr. Mickey Levy. In a subsequent session, members and bankers debated how best to navigate the treasury environment, which will be increasingly encumbered with regulations and resource constraints, but enabled by technology and systems advances. The day ended with a closed discussion for members only.
As the opening sessions on current challenges and updates on the euro crisis made clear, risk management is job 1, 2 and 3 for treasury in these circumstances. Members are busy with continuous monitoring of counterparties and cash balances, always with an eye over their shoulder. The most common risk-management response:
- Look for ways to “build firewalls” to ringfence their assets and businesses in the event of catastrophic outcomes post a Greek exit, which is looking increasingly likely.
Further takeaways:
- Counterparty risk must now be also considered in the context of sovereign risk, as in “which are the strong banks with the strongest backing of the strongest governments?” When not even the “risk-free” rate of return on investments is risk free anymore, cash is as risky an asset class as everything else whether it’s parked in government short-term securities or in bank deposits.
- What to do if safe banks stop taking deposits? A related concern brought up by a cash rich member is the worry that banks may stop taking deposits, or restrict the time period they will accept them. Then what to do with the cash?
- Asking why bank stress testing results are late. In the session led by Dr. Levy the question arose as to why the results from the latest round of European bank stress testing have missed their publishing deadline: are the results that bad or is something else going on?
- Who holds private household debt and what do they have it marked at? Dr. Levy noted that a key consideration in countries with high levels of household debt in the form of mortgages and credit card debt – like Spain – is who exactly holds the debt and what is it marked at? Has the debt been securitized, and if so, to whom. “The stress tests do not reveal this,” Dr. Levy remarked.
- Derivatives regs are not yet final, but hassles are expected. Next on members risk-management task list is assessing exposure to new financial regulations, which seem to grow in scope, reach and ultimate impact, e.g., the Dodd-Frank Act (DFA) in the US and similar/equivalents in Europe, like EMIR and MiFID 2. Because of delays in writing the final rules, few things are entirely clarified, but as discussions in other NeuGroups have also concluded, the final regs are likely to exempt reasonable hedge activity by corporates, but other hassles may increase (documentation and reporting, for example).
- Basel 3 will increase costs; how much is not clear. So, with the most onerous of the new OTC derivatives regs likely not catching corporate hedgers in their nets, the real game changer may be the implementation of Basel 3. There was complete unanimity on the conclusion that banks’ compliance with Basel 3 will raise the cost of doing business for banks, and no disagreement in the corporate community about whether the cost will be passed on to clients, all or in part.
- Relationships will matter more. The bankers observed that increased capital costs combined with technology advances and standardization in treasury and banking (SWIFT, standard messaging, etc.) – on which they emphasized banks should embrace and collaborate rather than try to differentiate themselves – will drive a sharper focus on the relationships between banks and their clients: not only will strategic partnerships develop and strengthen, banks should also concentrate efforts on “the things they do well” (what they can make money on) and allocate resources accordingly, noted Carole Berndt, Bank of America Merrill Lynch’s Head of EMEA Treasury Solutions. Corporates on their side need to manage the share-of-wallet well; this is something several members are trying to develop better scoring for.
- The treasury “day job” continues, nonetheless. Euro crisis or not, life goes on and treasury practitioners are tasked with a number of projects to drive efficiencies and increase visibility and control of risks and cash in the enterprise, while doing more with less (and keeping morale up!); other key issues that surfaced in the sessions included:
- Getting financial talent is especially hard for some. Recruiting treasury talent is an issue for certain companies, especially if they are in controversial industries or in geographically remote or undesirable areas to which finance and treasury pros don’t normally gravitate.
- Treasury systems always a topic. Systems upgrades, new implementations or RFPs are always going on for someone in the group.
- Cash generation and forecasting in ever-increasing focus. Net debtors and companies in thin-margin businesses focus on cash generation and forecasting, as do those who believe the cost of funding will go up and hence renew efforts to squeeze as much as possible out of working capital, combined with pooling and other liquidity optimization schemes.
- Bank documentation challenges abound. This is especially related to bank account management in Eastern Europe and emerging markets where businesses may also face frequent employee turnover. For them, eBAM can’t come soon enough, although, as Lesley White from Bank of America Merrill Lynch noted, “the e bit is the easy part, it’s the BAM bit that’s hard.”
Next EuroTPG event: The next meeting of the EuroTPG will take place in Dublin, Ireland in mid-to-late November (exact date TBD). Please contact Anne Friberg at [email protected] for information on how to join this group.