Too big to fail, but not too big to fail you

Rather like an unwanted dinner guest who doesn’t realise when it’s time to leave, the financial market collapse of 2008 is still having its impact felt by both banks and corporations alike.

Banks are balancing a mountain of regulatory requirements, such as the supplementary leverage ratio (SLR) and the liquidity coverage ratio (LCR); both of which are designed to provide market stability by ensuring that they have sufficient capital and liquidity to cover loan losses and cash outflows in the event of any future market tailspin. These hurdles have put banks in a position of having to be innovative with their business strategies; finding new approaches to managing their balance sheets, achieving profitability and building corporate relationships.

Corporate treasurers, meanwhile, no longer have easy access to credit and are unable to rely on a single, stable institution to service all their cash management needs. Nor do they have a worldwide stable of financial institutions to choose from, as many either no longer exist or wouldn’t make sense to do business with. Greece immediately comes to mind, but some venerable Italian institutions have recently been looking vulnerable. Amid this turmoil, corporations still have to effectively manage cash, finance operations and work to achieve their sales and profitability goals.

If you add in to this mix the instability and uncertainty caused by this year’s tumultuous events, such as Brexit and last week’s shock outcome of the US presidential election, it’s clear that the turmoil in the banking industry is far from over.

A change in thinking

However, as Winston Churchill observed: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” While it might seem on the surface as though the long-lasting fallout of the financial crisis represents a mutually distrustful stalemate between banks and corporates, the reality couldn’t be further from the truth. There are tremendous opportunities available for both banks and corporates that are willing to think differently about the ways business has always been done.

For banks, the opportunity lies in developing deeper relationships with corporate customers. While the days of stockpiling deposits for short-term revenue gains are long gone, there is tremendous value to be had in cultivating fewer – but far stronger – relationships that involve a variety of banking products and a focus on people, technology and services. Not only will these types of relationships be more profitable in the long-run, they also represent more operational deposits, placing less of a regulatory burden on the financial institution.

For corporations, the opportunities presented stem largely from a new position of liberation. No longer held at arm’s length and assessed for the possible threat they may pose to a financial institution; corporates have now moved into the driver’s seat of the banking relationship. This shift does mean the additional burden of having to evaluate banks based on the risk they may now pose, but it’s also the perfect chance for treasury departments to finally seize control of their own cash management. That starts with thinking about banking relationships in a way that’s never been necessary before.

A plan of action

To start, it’s important for corporations to diversify. Rather than rely on a single institution to provide all the products and services a business needs, corporations should find multiple banks across the markets they do business in and form working relationships with them. Doing so will enable businesses to take advantage of the unique opportunities available in those markets, while also distributing any risk that might be present.

Now, taking control away from financial institutions doesn’t mean there is no control. To support this bank-agnostic view of cash management, corporations should also make sure they have the appropriate technology at hand to maintain accurate, real-time visibility into their cash positions around the world, a requirement for any business to run effectively. There are plenty of tools and solutions available that make it possible to easily centralise payments and cash reporting; increasing efficiency, visibility and control of cash.

With proper control and an accurate forecast of cash flow, corporations can then be more strategic with their funds, such as taking advantage of the new deposit products some financial institutions are now offering, notably the enhanced-yield, 31-day notice accounts that are designed to attract deposits that are in alignment with the LCR’s run off factors.

To borrow another Churchill quote: “Difficulties mastered are opportunities won.” Ultimately, the biggest lesson that can be learned eight years after the crisis is that there is no such thing as stability. Banks looking to drive growth and increase revenue need to do so prudently, with an eye towards long-term relationships and rewards. Corporations need to take responsibility for their own financial needs and use banks as a stepping stone to achieve business success. When working together, both can make this ‘new normal’ a mutually beneficial success.


Related reading