Key Challenges for Treasury

The past 12-18 months has seen corporate treasurers focus on ‘core activity’: a back-to-basics approach to ensure that their company has enough liquidity to continue operating during the economic downturn. The main lesson learned from the financial crisis is that corporates need to have even better control of – and access to – liquidity, particularly since the external capital markets have ceased to function, which closed off an important means of accessing external liquidity.

Treasurers have also realised that they must also devote more time to bank relationship management. Some faced a severe crisis when their core banks were forced to exit the market and left them searching for new banking partners in a stressed environment. To make matters worse, in the lead up to the credit crisis, the trend was towards bank consolidation: for the past few years most corporates were steadily reducing the number of banking partners they dealt with. Today, they may be forced to go back to the banks they had previously deselected to ask for new finance.

In addition, when banks were forced to move back to their home markets due to governmental support, this retrenchment adversely affected corporate customers because it left a huge gap in funding in the marketplace. For example, when a number of global banks heavily reduced their funding to Nordic customers that were not core to their business, this left a funding requirement bigger than the total capacity of the Nordic banks.

Many customers suffered because the gap between an old bank stepping out and a new bank stepping in with a good pricing structure could potentially be quite long. Although it is possible to obtain some type of bridging loan after a few months, restructuring the balance sheet takes some time – and this is what corporate treasurers are now occupied with .

Corporates need to understand how to handle their banking relationships and also how to optimise their balance sheet after the financial crisis.

Where’s the Cash?

The global financial crisis highlighted the fact that most corporates don’t know exactly how much cash they have; even if they do, they can’t get their hands on it when they need it. Corporates have recognised that in order to be less dependent on their banking partners, they need to achieve end-to-end visibility of their cash flows and gain control over buried cash. But this is easier said than done when operating in complex markets.

For example, although some European companies see Europe as their main market and others still view the US as the single most important market with regards to turnover, an increasing number of corporates are looking beyond these borders for higher growth in emerging markets. Close to 75% of companies claim that Asia and eastern Europe are growth regions for their business.

But whereas the US and western Europe are mature markets, in the sense that corporates can easily move money around, the situation in Asia is very different. The diverse rules and regulations in Asian countries make it extremely difficult to control liquidity, currency, etc.

From a liquidity management perspective, Asia is considered to be the most complex region. It is not possible to simply transfer funds out of some countries – corporates need to jump through a number of legal and tax hoops in order to repatriate cash, if it is possible at all. Corporates also can’t easily exchange currencies, nor operate a regional cash pool, as they can in Europe.

For example, a company that has a cash surplus in Bangladesh can’t easily move the money to cover a deficit in South Korea; hence, it is extremely difficult to optimise liquidity. And as a company’s business expands, it will face these types of challenges more frequently.

Some changes, in terms of a loosening of cash flow and currency restrictions, are expected to occur in Asia – and the country currently showing the most progress is China, which recently opened up the renminbi as a trade settlement currency. However, harmonisation in any real sense will take a long time – which is frustrating because Asia is an important region and these restrictions hamper its development.

Another hot topic linked to the financial crisis is working capital management, which has gained extra attention in recent months and will continue to be a hot topic into 2010 – although it is surprising that many companies still have a loose model for managing working capital. Corporates will most probably, step-by-step, hand over the formal responsibility for working capital to the treasury department because they are beginning to realise that treasury is the best project manager for working capital initiatives. Although some companies try to manage working capital at the business unit level, it is more efficient to have the responsibility lie centrally with a team that monitors the progress, follow up, etc.

The credit crisis has focused the discussion on ordinary bank loans and working capital loans solely in order to survive. Corporates will spend at least another six months in restructuring their bank portfolio and maybe switching from bank lending to bonds and other tools. The move away from pure bank lending is a developing trend that will be seen throughout 2010.

Bank-to-corporate Relationships and Connectivity

Another topic that will begin to be more of a focus, perhaps later in 2010, is SWIFT for corporates, because companies are looking to be as bank-independent and streamlined in their processes as possible. The crisis has fuelled the fear of having to go cap-in-hand to a bank in order to secure funding. This fear has pushed corporates to explore a bank-independent set-up.

Therefore, SWIFT for corporates is gaining some traction, although it is not yet a hot topic in northern Europe. Corporates operating in this region firstly need to be able to answer their management questions on the single euro payments area (SEPA). They need to answer whether SEPA is something they should run with, or wait and see how others tackle it. SEPA hasn’t yet made it into the top three concerns for treasurers, mainly because the business case for SEPA is not there yet.

On the other hand, SWIFT for corporates will see more take up by corporates domiciled in countries where there isn’t a highly sophisticated set-up in terms of formats, processes, clearing, etc.

Banks have to respond by trusting their own capacity and capability – despite losing their proprietary electronic banking channel, they can still be a winner in serving their customers. Banks should not fear this move, but rather see it as an opportunity to use resources, currently invested in bank proprietary or semi-proprietary solutions, for value-added services for the client.


The finance revolution will continue in terms of establishing shared service centres (SSCs) for the centralisation of administrative processes. The SSC concept has been discussed for more than a decade and has never really been a headline topic, yet there has been a steady trend towards implementing SSCs. The Cash Management Survey 2009 found that centralisation is on top of the treasurer’s agenda.

Most recently, SSCs are popping up in eastern European countries, such as Hungary and Poland, rather than Ireland or India, for example. For European corporates, eastern Europe has become the centre for outsourcing mainly because of the knowledgeable people, but also because some countries have tax breaks for firms setting up SSCs.

The whole centralisation trend with working capital, with SSCs, with liquidity control, is clear, even though it is a second-tier trend.

More Regulations – New Opportunities?

When it comes to bank regulation in general, it has to be acknowledged that self-regulation did not work. On the other hand, many claim that the US is the most regulated market and yet that is where most of the problems originated.

In any case, banks need to devote time to rebuild their reputation in the eyes of the corporates. Even if a corporate treasurer is clever enough to understand that the world was heading for an economic downturn regardless of the banks’ behaviour, they are still asking themselves: “What were these bankers doing?”

Corporates weren’t asking for all of these very complex financial instruments. A senior executive from a construction company said: “We don’t need many of the instruments that [the banks] are providing in the market. We need to hedge interest, assess risk and swap currency.”

Alongside increased regulation comes an opportunity for new players. Next year will probably see more non-bank players entering the market because there is a vast business opportunity opening up, particularly in Europe, for IT companies to insource the non-core processes of both banks and corporates.

There is so much compliance work and presently everyone is doing it themselves by investing in processes and systems in order to cope with the regulatory burden. For example, there are thousands of banks in Europe struggling to accomplish more or less the same thing with SEPA, the Payment Services Directive (PSD), Know Your Customer (KYC), anti-money laundering (AML), etc.

A market section should take advantage of this opportunity because it is a cost for the whole society that individually each entity is investing in similar projects, instead of spending the money on more productive areas. And if the regulators continue along this path of more and more regulation, then someone will step in to fill the gap.

Risk – A Tier 1 Concern

Just as some began to believe that the financial crisis was over, Dubai World’s possible default sent a shock wave through the system again. The domino fear is still very much alive, which is why risk remains at the top of the corporate treasurer’s agenda. Shifting from other types of risk, today the hot topic is operational/event risk primarily because the main suppliers of liquidity are banks and if they, or a sovereign, run into credit problems, then operational risk comes to the fore immediately.

Currency and interest rate risk is also a growing concern, following the dramatic volatility of the past year and with further changes, both in interest and exchange rates, expected next year. In this part of the world, there will also be inflation pressure. Maybe it is worth mentioning that commodity price risk is also a big area of concern, given huge swings in price of oil and other commodities and great uncertainty about future developments, especially on the demand side.

Due to the extremely low interest rates, private individuals are consuming like mad. The central banks have not yet dared to raise the interest rates, but if the rates move from 0.25 to 0.50, this is quite a substantial change in relative terms. Plus, ultimately there will be quite significant changes in exchange rates between important currencies, such as the euro, and the Nordic currencies.


Even though the economic situation may be starting to settle down, there is still work to be done because the financial industry has yet to settle the banking structure of the future. Consequently, in the coming years, the banking industry will see significant changes, whether fuelled by initiatives like SEPA or the crisis itself. The whole financial services industry will be pushed into something new and, hopefully, better.

At present the cost of liquidity for the corporate customer is rapidly coming down, and, unless something dramatic happens at the beginning of 2010, the capital market should be more or less normalised after next summer. When that happens, then the focus will shift to continuing with treasury centralisation and expanding SSCs.

To read more from SEB, please visit their gtnews microsite.


Related reading