Strategic Treasury: The Cost of Playing it Safe

An emergent zero interest rate environment is the most recent upheaval in an already challenging landscape for corporate cash management. That said, such is the environment of economic uncertainty and credit constrictions that risk mitigation remains the primary concern, inducing treasurers to prioritise the security and stability of deposits over returns. Indeed, so great are concerns over bank security that many corporates have taken to stockpiling their cash, a trend likely to gather momentum as regulatory change raises concerns over a potential increase in the price of debt.

Yet this cautious behaviour comes at a cost. Not only are corporates totally foregoing yield as they hoard their funds – an unsustainable strategy over the medium term – they are also enabling the erosion of value through inflation, which diminishes their future purchasing power.

While these factors undoubtedly give cause for concern and are to companies’ detriment, the real cost of stockpiling cash is being revealed by challenges presented by the zero-rate environment.

Zero interest rates mark an inflection point in the declining affordability of keeping cash on deposit, as demonstrated by the introduction of charges for current accounts in a growing number of currency areas such as the Danish krone (DKK). This practice is likely to become more commonplace as market challenges continue, most notably in the eurozone, and regulatory pressures such as the Basel III Accord force banks to chase longer-term cash deposits and penalise those placed for 90 days or less. Certainly, banks are already quoting negative rates for short-term deposits in euros. Although we have yet to see evidence of corporate clients being charged negative rates, growing concern over whether such charges will extend to euro-denominated holding deposits will spark a definitive and strategic shift in the corporate approach to cash management.

Seemingly paradoxically, a strategic approach to cash management necessitates an open-minded and, of course, calculated attitude to risk. Indeed, the perils associated with hoarding cash – somewhat misguidedly considered the safe option -prove that there is no such thing as risk-free cash management, meaning that corporates must be willing to explore alternatives. Despite market turbulence and the ongoing regulatory onslaught, there remain viable alternatives to keeping surplus funds on deposit for those willing to brave short-term risks in order to achieve long-term growth.

For example, the repurchase agreement (repo) market is opening up to corporate investors, and offers plenty of opportunity, while yield – albeit with risk – can still be found in economies such as Italy and Spain. The strategic use of currency conversion is also shaping up to be a key cash optimisation technique and is a recourse already gaining traction. A case in point is the growing conversion of surplus euro funds into Australian, Canadian and US dollars, Swiss francs and pound sterling, which are widely perceived to be safer and more stable.

Such emerging opportunities and techniques prove that, despite unprecedented difficulties, there are ways for treasurers to make company cash work harder. In fact, the only real barrier to optimal cash and liquidity management is not the testing financial climate but a prevailing corporate mind-set that favours caution over innovation. Going forward, this attitude must change if businesses are to succeed.

An Increasingly Challenging Role

Achieving such a radical change in outlook is admittedly no mean feat. The need for a more considered approach to managing company cash comes at a time when treasurers are under intense strain. The ongoing effects of the 2008 financial crisis mean that treasurers have seen their remit broaden, from an administrative and often add-on function to a full-time strategic role with responsibility for bottom-line improvement. For many treasurers, the duties that come with this expanded role represent unchartered territory, which must be navigated from both operational and strategic standpoints.

Coping with this new ground from a purely operational perspective requires enhanced levels of transparency and greater visibility over multiple cash positions and end-to-end transaction flows. Certainly, greater visibility over cash positions, movements and exposures is vital if treasurers are to adequately assess their cash and liquidity management needs on a cross-border basis. Without such accurate real-time overviews, they will be poorly placed to know where they stand in the short term, let alone implement lasting, sophisticated optimisation strategies.

Yet increasing visibility is only the first step. The ability to control cash depends on intelligent electronic platforms that enable superior collation and interpretation of data, instantaneous transference of intra-day positions and streamlined processing of cross-border cash flows. In conjunction with improved visibility, this is now vital to achieving greater control and dexterity over cash and liquidity positions.

Optimisation Through Collaboration

Technology, no matter how advanced, can only achieve so much and must be leveraged by expertise. The role of the treasurer has always required specialist understanding, yet the unparalleled market and regulatory challenges now being faced necessitate a whole new of level of knowledge and insight and one that many treasurers will struggle to reach without outside help.

For this reason, more corporates are enlisting the services of a specialist, global cash management provider for all aspects of cash management from treasury services to investment decisions. This can be a highly effective arrangement, where corporates benefit not only from such providers’ advanced infrastructure and cross-border capabilities but also from the broad range of internal expertise they have at their disposal. 

This collaborative approach to cash management – where a consultative understanding of risk-return requirements can produce flexible and unique solutions catering to corporates’ individual needs – is even more valuable during times of economic uncertainty when the risks are greater. As the macro environment continues to produce economic challenges, and the benefits of strategic, proactive cash management outweigh the security of cash stockpiling, a fresh approach to cash management is imperative. This may be achieved by collaboration, which is set to become a key component of strategic treasury management and can allow corporates to successfully optimise their cash despite present and future economic upheavals.

To read more from BNY Mellon, please visit the company’s gtnews microsite.



Related reading