In future years, it will be remembered that no UK conference that took place in the spring of 2016 was complete without a poll of delegates on whether they supported the country’s continued membership of the European Union (EU).
With the referendum vote now only five weeks away, not surprisingly treasurers at this year’s Association of Corporate Treasurers (ACT) annual conference in Liverpool were asked on Day One: ‘Are you leaning towards leaving or remaining in the EU?’. While opinion polls indicate only a fairly narrow lead for the ‘Remain’ camp, most British financial professionals are aghast at the prospect of a ‘Brexit’ with 85% of the audience voting for ‘Remain’ and only 15% for ‘Leave’.
Another opening day poll of which factor was currently having the greatest impact on their business saw nearly 45% of delegates cite volatility driven by uncertainty – of which the Brexit prospect is a major part. Uncertainty was cited by far more of the audience than other factors such as regulation, digital disruption and bank retrenchment.
The derivatives giant
An opening presentation by economist John Kay, whose most recent book was ‘Other People’s Money: The Real Business of Finance’, considered the steady advance over the past 40 years in the financial intermediary sector.
“What do modern economies need finance for?” asked Kay, who answered his own question by suggesting four main areas. Firstly to operate a payments system and thereby act as a basic utility on which modern society depends; secondly for wealth management in its broadest sense; thirdly to assist with risk management; and fourthly to assist with the allocation of capital.
However, today’s markets and the process of intermediation meant that these four basic purposes had been lost sight of, said Kay. Many believed that this created the need for more regulation but regulation tended to be part of the problem rather than a solution to it – although moves within the banking sector to separate investment banking from retail banking were a step in the right direction.
“We’ve pointlessly imposed large fines on the major banks in recent years, but the individuals responsible for their bad behaviour have largely avoided criminal prosecution,” he noted. “There is still a great deal of unfocused public anger around the world among people who know that something went very wrong back in 2008.”
As a result, there is a very real risk of a further global financial crisis in the offing, while in the meantime politicians at the extreme ends of the political spectrum are steadily appealing to more people.
What Kay would like to see is “smaller and more specialist institutions, in which profit is more directly related to the value of what they do.”
“We also need politicians who are willing to stand up to the vested interests of the financial services sector,” he added. Kay is also sceptical about the sector benefiting from greater transparency. If the public had a greater awareness of the various activities that it carries out “greater transparency might simply lead to greater distrust.”
Regulation and liquidity management
An afternoon session focusing on regulation and liquidity management kicked off with the observation by Stephen Baseby, the ACT’s associate policy and technical director, that the Basel III capital adequacy regime was still in the process of implementation, while in Europe money market regulation was still in play. Both impacted on liquidity management, although possibly that impact was less than generally assumed.
Jennifer Doherty, global head of commercialisation – liquidity and investment products for HSBC, cited two major questions stemming from Basel III. The first was the respective treatment of operational and non-operational deposits; an issue that had been regarded as mainly focused on the banks, but which was now also starting to impact on their corporate clients also. The second was the Capital Requirements Directive, aka CRD IV, which was making notional pooling by corporates rather more difficult than it has been in the past.
Colleague Jonathan Curry, HSBC’s global chief investment officer, asset management, noted that while it is easy to articulate concepts, actually writing regulation that is similarly clear-cut is a far harder task – exemplified by the variety of definitions as to what exactly constitutes operational deposits and distinguishes them from those non-operational.
It appears that clarification is unlikely to be achieved until after the regulation becomes fully embedded. in the meantime, many banks -particularly those operating globally – tend to adhere to the most stringent interpretations so that they minimise their risk of contravening the rules.
There is better news in Europe on money market funds (MMFS), which Baseby said appears to have flummoxed European regulators – unlike their peers in other parts of the world. SInce the Dutch assumed presidency of the Council of the EU at the start of this year, progress has been achieved.
“The good news is that there should soon be a viable MMF product available (for European treasurers) thanks to the support of the financial services industry, who made it clear exactly what the product is and why they value it,” added Curry.
“We should end up in a better place as understanding of the product has improved and it is also now far more transparent than was the case before the financial crisis.”
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