Corporate Treasurers Putting Contingency Plans in Place, Says IT2

Following the World Bank releasing gloomy forecasts about the direction of the global economy, IT2 Treasury Solutions looks at the ramifications of further economic uncertainty in Europe and the rest of the world for corporate treasurers. Kevin Grant, chief executive officer (CEO) of IT2 Treasury Solutions, said corporate treasurers are at the forefront of ensuring organisational ability to navigate and survive factors resulting from a global slowdown. These factors include:

1. Increased counterparty risk

According to the Association of Corporate Treasurers (ACT), irrespective of any impact on the euro, sovereign and commercial debt write-downs and continued or increased bank funding squeeze could result in bank defaults. Companies need to prepare for this risk. This is not a new requirement or dissimilar from normal best practice credit risk management but requires a different focus to that which many companies may currently adopt, for example the need to monitor risk and limits by counterparties.

This needs to include all exposures (cash and derivatives) but assess them individually (by country and type) to reflect netting provisions and rights of set-off. The ACT also encourages corporate treasuries to review credit limits for all banking counterparts and ensure they stay updated on credit downgrades. It advises the introduction of a policy to cap credit risk by jurisdiction if not already in place.

IT2 recommends

  • Use of multiple market sensitive and other indicators of risk and management of limits (e.g. including credit default swap (CDS) spreads, equity prices and credit ratings).
  • Key performance indicators (KPIs) for the achievement of acceptable levels of risk, further to policy implemented in accordance with ACT advice.
  • Access to real-time mark to market of financial assets in order to ascertain ongoing change in the value of assets as impacted by fast-developing risk and liquidity conditions.

2. Funding risk (scarcity and increased cost of funding)

Treasurers are already making more use of internal cash, increasing visibility from current levels of 80%: half of treasurers anticipate increasing visibility to over 95% in three years, increasing their ability to survive without recourse to bank funding – a significant increase in ambition, given that this typically becomes harder as greater levels of visibility are achieved.

3. Market volatility and liquidity risk

More treasurers are beginning to demand real time access to the status of exposures, the performance of hedged positions and actual, immediate access to policies for managing exposures in a volatile context.


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