By Joseph Neu
Looking back on our various NeuGroup discussions in 2012, there are more than a few trends that bear watching for treasurers in 2013. Three, in particular, though, are also likely to shape treasury management practices for several years to come.
1) Bank relationships tied to mutual, risk-adjusted cost-benefit analysis. A consistent discussion topic this year has involved treasurers deploying increasingly sophisticated counterparty risk models in managing banking relationships. Treasurers are using risk analysis to get “early warnings” on bank issues, but also shifting business pro-actively in response.
At the same time, we are hearing from banks that they are becoming more focused on the types of customers they bank and the type of banking business they will emphasize—based on regulatory capital and liquidity rules, but also on returns considering these new requirements.
These trends together with regulatory stress-testing and reporting by banks will create market dynamics that will determine which banks are deemed safe and successful, how bank groups are formed, and which services are outsourced to banks, moved to non-banks, and what brought in-house. The good news is that this combination of trends will also ultimately serve to mitigate counterparty risk across the financial system.
2) Shifting value-added activities to “shared service centers.” This trend also has several nuances. The first acknowledges the continued blurring of lines between what have been traditionally thought of as shared-service centers (emphasizing back-office administrative and financial activities) and treasury centers (emphasizing front-office and high-value activities). Included in this blurring is the widening use of in-house banks (IHBs) for treasury services (see “Global Liquidity Shifts Favor Further Treasury Use of In-House Banks,” November 2012).
The second nuance represents something of a re-centralization play to focus decision-making on value-added activities like cash investment, business support, bank relationship management and M&A outside HQ and closer to the ground across the globe. In addition to putting “problem-solvers” and “thought partners” closer to global challenges, however, a small but growing part of this trend involves tax planning (moving substance offshore, especially for US MNCs) and creating more opportunities for regulatory arbitrage in response to financial regulations. The higher taxes and regulatory burdens go, the more incentive there will be to move off-shore to avoid them.
3) Responding to growing compliance challenges. Speaking of tax and regulatory burdens, the third megatrend to be mindful of is determining how treasury should keep itself in compliance with the growing number of post-crisis rules that will be impacting them. Current efforts to get the board set up to approve an end-user exemption for Dodd-Frank derivatives rules should serve as a red-flag that treasury is, sooner or later, going to need a full-time compliance function, if it does not have one already.
The IHB notion in the second trend is also telling here. As treasurers following the devil in the details of the aforementioned end-user exemption know, centralized hedging via an IHB is already creating potential compliance headaches. And like the Dodd-Frank rules themselves, this is only the tip of the iceberg of what’s coming.
It also should be no surprise that the increasing regulatory burdens targeting banks (including Basel III, FATCA etc.) will also be impacting treasuries directly or indirectly, and the more treasuries look to IHBs, the more they will also have to emulate banks in dedicating resources to compliance.
One possibility is to expand the concept of a treasury controllers’ group to deal with the additional compliance burdens. However, in no way will these compliance efforts be contained in silos.
As corporate treasurers with large finance companies know already, compliance and the risks of non-compliance need to be part of their thought process from front-to-back. And then comes the top-to-bottom corporate governance requirements that tend to accompany these rules.
This is good news again for treasury management system providers. While systems to automate the day-to-day activities of treasury have been needed to give treasury bandwidth for crisis management, now, even more bandwidth must be created, plus applications developed, to manage and report on regulatory compliance.