The Role of Banking Relationships in a Global Treasury

As corporations expand into emerging markets, treasurers are faced with new challenges in terms of raising capital and managing a wide variety of risks. They depend on close relationships with global as well as local banks in order to succeed. However, they know all too well the disadvantages associated with maintaining a plethora of fragmented banking relationships. Inefficient banking relationships are time-consuming, costly and a source of operational risk. For that reason, centralisation of banking business was long a treasurer’s ‘Holy Grail’ and conventional wisdom held that the fewer banking relations, the better.

That is until the default of Lehman Brothers altered the game by introducing counterparty risk as a top concern. When it became clear that banks would not always be backed by their states and could actually default, the focus shifted from centralisation to the control of counterparty risk.

Treasurers found themselves caught between two somewhat conflicting goals. On the one hand, they needed to continue to streamline their treasury operations in order to cut costs and improve efficiency. On the other hand, they needed to be prepared to quickly shift their business away from any source of high counterparty risk. This core issue remains: although global treasurers need close ties with many different banks, it is difficult to achieve operational efficiency when dealing with a large number of disjointed banking relationships.

In order to standardise the banking experience globally, treasurers are now seeking ways to simplify their banking relationships without compromising efficiency. Can treasurers ensure that they get the same experience from each bank? What are the challenges? How will new regulatory initiatives affect the way banks and treasuries do business? And what other services are needed from their banking partners?

The Changing Relationship Between Treasurers and Their Banks

The level of focus on banking relationships tends to fluctuate with the state of the economy. With a free flow of cash and credit, there is less need for treasurers to focus on banking relationships. They have ready access to everything they need, and the prevailing trend in good times is to centralise as much business as possible with a single bank.

A financial crisis, however, serves as a not-so-gentle reminder that banking relationships can make or break a company. With the credit crunch of 2008 and associated overnight disappearance of faith in some centuries-old global banks still fresh in the memory, treasurers are now seeking to balance risk levels with operational efficiency in their banking relationships.

In order to control banking relationships, an aggregated view is required. A treasurer might start by taking inventory of all the banks used by the entire organisation, not just those that provide treasury-related services. Once they are all known, it is time to start tracking the amount of business each one is getting, and what the corporate receives in return. As in any relationship, there must be a healthy balance between give and take for both parties. Once the nature of all banking relationships are known, a treasurer can make a fact-based decision on which ones are worth maintaining or investing in, and which can be eliminated. The result is a clearly defined list of banks where business should be concentrated.

Concentrating business to a limited number of banks offers a wide range of advantages. For example, providing a sizeable business volume will make the corporate a prioritised customer with access to the banks’ balance sheet for long-term funding and risk sharing. It also offers possibilities to lower total banking costs, improve cash management and facilitate the implementation of commonality and streamlining in cash flow activities. More general benefits include improved operational efficiency, easier legal procedures and less administration.

As banking relations become less about feelings and more about facts, technology plays an increasingly important role. Internal follow-up of transaction data is important not only to help traders distribute their business evenly across each of their core banks at an aggregated level; it is also an important tool for treasurers in future negotiations with their banks, as it clearly illustrates whether or not each bank is getting its fair share of the business in relation to what it offers in return.

It is worth noting, however, that even though corporates would theoretically improve operational efficiency by concentrating business to a single bank, most treasurers would not consider this option. Uncertain access to funding during periods of liquidity shortage of the main bank and increased counterparty risk is one reason, but the fact that banks have different areas of expertise and vary in strength across regions also necessitates the maintenance of a range of banking relationships.

Need for Risk Control Spurs Trends of Standardisation and Automation

The focus on risk control has stimulated the emergence of various initiatives aimed at standardisation and automation. Banks and treasurers are now co-operating through a wide range of initiatives, all aimed at reducing various forms of risks.

Credit risk, as well as counterparty risk, can be mitigated by the use of a credit aupport annex (CSA). Banks have long wanted corporates to increase their use of CSAs but many treasurers remain hesitant, partly due to CSA’s inherent lack of transparency. The bank’s credit spread is not visible within the total spread, making it difficult for treasurers to ensure that the bank actually eliminates its credit spread when converting to a CSA.

Banks and treasurers must therefore find a way to co-operate in this area in order to increase transparency and build mutual trust. Even if a treasurer does not plan to start using CSAs immediately, the corporate’s position might rapidly change, perhaps due to a lower credit rating. Such a change might necessitate the use of CSAs with little lead time. With processes already reviewed and a CSA plan in place, a treasurer will be prepared to start using CSAs on short notice.

An effort to reduce counterparty and operational risk is the key driver behind European Market Infrastructure Regulation (EMIR), a new regulation on over-the-counter (OTC) derivatives, central counterparties and trade repositories. Much like CSA, EMIR aims at reducing counterparty risk by continuously managing the market value at stake. All standardised OTC derivatives are to be cleared through a central counterparty in the EU by the end of 2012.

With a large number of banking relationships and a broad exposure to counterparty risk, a treasurer must increasingly take into consideration the settlement risk associated with foreign exchange (FX) trades (also known as Herstatt risk). An effective way to eliminate this risk is to take advantage of Continuous Linked Settlement (CLS), a banking industry initiative which removes the settlement risk associated with FX transactions. In addition to removing settlement risk, CLS also greatly facilitates the internal administration of FX trades in the back office.

Operational risk is effectively reduced through automation, but in this area a lot of work still remains. One area where the need is particularly urgent is reconciliation in every way, shape and form. Today’s more complex business deals involving several different counterparties, generate a huge number of required reconciliations for treasurers as well as banks. Examples include bank account and custody reconciliations, but also reconciliations to ensure consistency between internal systems as well as myriad spreadsheet models. Today, reconciliations remain largely manual processes, wasting time and money and increasing operational risk.

What Treasurers Need from Their Banking Partners

Generally speaking, banks need to gain a better understanding of the treasury’s everyday business and problems in order to provide a perfectly aligned service offering. Furthermore, banks in general must increase their level of automation and offer standardised platforms for basic integration. Currently, many banks have opted for proprietary solutions such as in-house FX platforms, confirmation platforms, etc. These platforms force the treasury to spend significant resources developing interfaces to each and every one. There is currently little incentive for banks to change this practice as it causes the treasurer to think twice before changing banks. It is simply too costly and complicated to develop new interfaces and processes.

However, the fact that treasurers now slice their business and distribute it evenly across several banks increases the need for more standardised technology. This could be achieved in a couple of ways. One option is that banks globally agree upon a common standard and adhere to it. Another is for banks to accept being connected to their customers via market leading platforms such as FXall, Misys, etc. However, it is currently very expensive for banks to sell their products over these industry-standard platforms. In order to gain broad acceptance and to become the prevailing standard, the providers of these platforms must make it financially attractive for banks to use them.

Treasurers also have an important role to play in this development. They need to demand that their selected banks are able to handle flows through the industry standard platforms, rather than insist upon the use of proprietary solutions.


A treasurer can standardise the banking experience globally without compromising efficiency by creating and implementing a global banking relationship policy. This is done by taking inventory of all existing banking relationships, measuring their business value and concentrating business to those banks that provide the highest value, as defined by the treasurer. Every bank on the list should have a clearly defined part to play and be awarded business accordingly.

The need for risk control is driving a number of initiatives that affect the way banks and treasurers do business with each other. Automation and standardisation are eagerly sought-after by treasurers. There are several ongoing initiatives working in this direction. However, a global treasurer’s business needs could be met much more efficiently if banks were to globally agree upon harmonised technology platforms and automated, standardised processes.


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