Adapt and survive: managing liquidity in a radically changed world

The financial landscape that chief financial officers (CFOs) and corporate treasurers currently inhabit has been fundamentally changed by macro-economic developments; in particular, by the introduction of negative interest rates by a number of central banks across the globe. Yet arguably even more far-reaching changes for corporates have crept in more quietly via financial regulation, which indirectly determines what options they have when investing and raising money.

Those responsible for managing their company’s liquidity could be forgiven for feeling they live in challenging times. Ever since the 2008 global financial crisis, cash-strapped companies have had to surmount greater hurdles than ever to raise finance. However, life has recently become a headache for cash-rich corporates as well, as they face paying – rather than earning – interest on some deposits.

The obvious driver of this trend is that several central banks – including the European Central Bank (ECB) and those of Denmark, Sweden, Switzerland and Japan – have declared negative interest rates in order to encourage borrowing and stimulate their countries’ flagging economies. Whether this will benefit those economies in the long-term remains to be seen. However, such policies have had the immediate effect of increasing costs for those banks holding deposits with the aforementioned central banks. Some promptly responded by charging customers for holding deposits.

Yet arguably these macroeconomic changes are merely the tip of a vast iceberg of change affecting corporate liquidity; much of which is less visible and less immediately comprehensible to corporates. Below the surface lurks an even larger block of change brought about by banking regulation. Until fairly recently, this was an area that companies could safely ignore, but now it is both directly and indirectly affecting many of the choices they make when managing their liquidity.

The impact of post-crisis regulation on banks’ lending appetites has been well-documented. However, regulation is now also impacting banks’ preferences with respect to corporate deposits, which is having a knock-on effect on corporate investment decisions. Despite this, many corporates have yet to fully comprehend the precise effect that banking regulation has on them, let alone understand how to negotiate it and ensure they are making the most of their altered opportunities.

Regulation’s effect on corporate choices

A clear example of the impact of banking regulation is the Basel III capital adequacy regime, which puts the onus on banks to hold sufficient reserves of ‘high-quality liquid assets’ (HQLAs) – being assets that could be easily converted into cash within a day with no loss of value – to balance those assets that the regulator considers likely to “flow out” of the bank in the case of a “30-day stress event” (i.e. a run on the bank). The required liquidity coverage ratio (LCR) – or the ratio of HQLAs to other assets considered less liquid –   is currently 70% in the European Union (EU) and 90% in the US, but next year is scheduled to rise to 100% in the US, with the EU catching up in 2019. In practice, this means that banks must classify every deposit they are given as either an HQLA or otherwise.

When it comes to corporate deposits, banks now therefore distinguish between operational and non-operational deposits. Non-operational deposits cost banks more to hold, as the regulator deems these have a 100% “outflow factor”, meaning they are expected to be withdrawn in the case of a stress event. Therefore, for every euro of non-operating cash that it holds, the bank currently has to hold 70 cents (in due course this will be €1) in HQLAs. This has transformed banks’ approach to customer deposits, with operational cash becoming attractive for them and non-operational cash less so.

There is, of course, much other regulation affecting corporates’ liquidity, for example the Markets in Financial Instruments Directive II (MiFID II), which is bringing in a complete overhaul of the regulations governing the trading of stocks, bonds, derivatives and commodities in the EU. This is due to come into force in mid-2017 and is likely to result in further system costs for banks that will ultimately trickle down to customers buying and selling these as investments.

One thing is clear: recent developments have brought about a step change for treasurers in terms of the complexity of the factors they need to take into consideration. In addition, the level of flexibility and reactiveness to change required of them has risen significantly. However, what they need first and foremost is a good understanding of the interconnections between banking, regulation and monetary policy and their respective effects on corporates’ choices. Achieving this will put treasurers in the best possible position to plan a successful liquidity management strategy.

New tactics: the cash-strapped and the cash-rich

Armed with this understanding, treasurers may deploy a range of tactics to optimise their company’s liquidity position; depending on the nature of their business, its daily operations, supply chain dynamics and myriad other interlinked factors.

Cash-strapped corporates may benefit from an initial review of their tools to ensure they have maximum visibility and reporting accuracy over all their cash flows globally, in order to increase the reliability and accuracy of their forecasting; shown by recent research to be the single activity to which treasurers dedicate most time.

Technological developments are helping here, already offering something approximating to a real-time view of cash flows across the various parts of a business. Technology also allows treasurers to integrate different data streams and perform customised analysis to aid their daily decision-making. A full real-time view of all the company’s/group’s cash flows and assets at any given moment allows treasurers to plan and exploit their potential in the business to the full.

In addition, centralising the management of payments and receivables globally may offer treasurers more control over their company’s working capital, allowing them to take advantage of a variety of opportunities. For example, such centralisation allows treasurers to proactively manage their group’s currency exposures across its various operations, or optimise interest on balances in different locations.

On the other hand, liquidity may be improved by solving a more complex or specialist problem; for example negotiating the local regulatory and financial environment to hedge foreign exchange conversions, or investing trapped cash in-country.

Being politic with plenty

Companies that are cash-rich will naturally be primarily interested in where to invest their excess cash in order to avoid inciting costs in the current environment. However, they should appreciate that liquidity management is a far broader task than simply avoiding losses around deposits and every corporate can benefit from a periodic overall review of its cash and liquidity management in order to improve operational performance.

Such a review might include a “scenario-building” exercise to identify whether this is a good time for redeploying excess cash in traditional ways, such as buying new property, plants or machinery; into research and development; or possibly a merger or acquisition. In terms of straightforward investments, all types of products, old and new, need to be re-examined for their suitability in these changed circumstances.

What were played-in options before may need to be revisited and reconsidered. Investment, tax, and accounting policies may all need to be reviewed to understand whether money market funds (MMFs) will be suitable, feasible and permissible in view of certain recent money market reforms in Europe and the US.

On the positive side, corporates may find they can make more efficient use of collateral – such as mutual funds or securities -via various deposit and investment products which allow them to maintain liquidity in their payment streams on the basis of that pledge.

In summary, treasurers must improve their understanding of each of the various drivers affecting their changed financial environment. Many will have to revise their company’s investment policies in the light of the changes in regulation, economics and the market environment, and they will of course aim to strike the required balance between yield, maturity, principal protection and risk diversification.

On a daily basis, they need to be on the constant look-out for further changes in all these different areas, so that they can exploit all opportunities occurring to reduce costs, streamline cash flows and get the most out of any excess cash. Unfortunately, in this brave new financial world, the best opportunities today may differ from those available yesterday or those which will be on offer tomorrow –   but for those who keep diligently looking, there will be plenty.


A newly-published white paper from Deutsche Bank Global Transaction Banking, ‘Liquidity Management: Thriving in a new world’, can be accessed here.

Related reading: What are the objectives of liquidity management?


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