More Challenges for Banks Thinking Global

June 11, 2013

By Joseph Neu

Bank relationship trends continue to be a hot topic in recent forums for treasury professionals. The focus of discussion seems to fall into three major areas: 1) the little-understood consequences of global banking regulations; 2) the increasing tension between local and global banking partnerships; and 3) treasury practitioners’ increasing impatience with banks’ internal sales drivers. All these trends affect the top global banks the most.

  • Regulatory consequences. It would be easy to understand banks’ need to raise pricing in response to new regulatory requirements, but because these pricing changes have been slow to come, treasurers are confused. And the confusing nature of regulatory consequences has been compounded by the myriad regulations and applications being proposed around the world. These are not all well understood by banks or the regulators tasked with their creation and implementation, much less practitioners.

As an example, at a recent NeuGroup Assistant Treasurers’ Group of Thirty meeting, Elyse Weiner, Global Head of Citi’s Liquidity Management Services sparked a significant reaction when she described the trend toward regulators forcing banks to set up separately capitalized local subsidiaries (as opposed to branches) in order to protect local interests in the event of a bank failure.

The US is prompting more of this with its rather significant proposed separately capitalized subsidiary requirement for foreign banks operating within its borders, but it is not alone. And the UK is taking the ring-fencing concept further, looking to segment banks into separately capitalized entities by line of business and not just jurisdiction.

If global banks are forced to operate increasingly as separately capitalized entities it will become even more of a challenge for them to serve global clients seamlessly—especially at similar cost. It will also change the nature of how treasurers look at their bank counterparties. Most global bank subs, for example, do not currently have an explicit parental guarantee. This prompts the question of whether treasury should weigh the risk of the sub, or insist on a parent guarantee as some banks ask of them. Regulators carving up global banks for systemic safety reasons need to consider such consequences.

  • Local-Global partnership. Adding more color to a topic touched on here in February, a panel discussion on banking relationships at the EuroFinance 19th Annual Conference on International Cash, Treasury and Risk for Finance Professionals in Asia stressed the importance of local presence to understand the regulatory environment in a given country and what it takes to do business there. However, the panelists also noted the equal importance of local partnering with global banks to leverage their global technology infrastructure.

This suggests a key opportunity for global banks, given the aforementioned increasing regulatory constraints, to work with local banks to help modernize and integrate their technology into global frameworks. This will enable local banks to serve their outbound clients better, too, as more and more emerging Asian companies become multinational.

To be successful, however, the global banks will need to structure their management information and compensation structures so that a strategic client can get the same level service in Vietnam, even where a local bank partner is involved, as they do in London. Corporates on the panel stressed that banks’ “organizing principles need to be designed around the client.”

  • Bank-side relationship management incentives. The need for this organizing principle also came up during a revealing discussion at the recent NeuGroup Asia Treasurers’ Peer Group meeting in Singapore. It emerged that bank relationship managers are more often incentivized to push a given product or internal bank goal.

This helps to explain the frustration expressed by corporate customers that their bankers too often pitch them products ill-suited to their needs.

With all the lip-service given to developing client-driven solutions, too few banks seem to structure their management incentive schemes to encourage this.

Accordingly, banks that can incent relationship managers to deliver client-driven solutions consistently and globally, link global infrastructure with local partnerships and develop clever workarounds to regulatory segmentation will enjoy outsized success in the years ahead.

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