Intraday Liquidity – How Much is it Worth?

New legislation that increases capital requirements for banks may negatively affect the smooth running of the payments system – this was the fear articulated by both bankers and corporates at the International Payments Summit (IPS) in London earlier this month. Such legislation would mean that banks would have to hold onto more liquidity/collateral, and effectively become more sensitive to the timing of cash flows.

While corporates have seen the disappearance of easy access to intraday credit and a more risk-adverse attitude to credit lines, with some credit lines already gone, banks are now under pressure to consider liquidity pricing. In the session ‘Managing Liquidity and Intraday Liquidity Risk’, Maurice Cleaves, managing director, head of Europe, Middle East and Africa (EMEA) region cash management product management, Deutsche Bank, said: “Intraday liquidity is not a commodity that is free any longer.”

But will banks be able to charge their corporate clients for it? This was an important debate between bankers and corporates at the summit.

In the Corporate Treasurers’ Forum session ‘Challenges Facing Corporate Treasurers in the New Financial Landscape’, Nick Downes, principal consultant, UK financial services, Logica, floated the idea that large unscheduled payments may incur additional ‘liquidity fees’. He suggested that cash management services should be expanded to include liquidity forecasting.

But a straw poll of the corporates in the audience showed that not one was prepared to pay for intraday liquidity.

In the corporate roundtable ‘What Do Corporates Want from Payment Providers Now?’, Ronald Mulder, financial manager, Eurocil Holdings, agreed that intraday liquidity was a big issue, but that corporates and banks should be able to work together to solve the problem. “We didn’t understand why liquidity was such a big issue because, before the credit crunch, everything worked fine. Some of our banks didn’t tell us about liquidity issues until they were upon us – this was a shame because working together we could solve the problem,” he said.

When the plenary audience was polled as to where corporate treasury needs support from banks, working capital management came out on top, with 35.9% of the audience; liquidity management was second with 31.3% of the vote.

2010 – A Year of Cautious Optimism

Daniel Marovitz, head of product management, Global Transaction Banking, Deutsche Bank, opened IPS on a positive note, saying that 2010 will be the year of cautious optimism. He compared this year to 2008, as the financial system headed into crisis and the world was “managed by fear”, and 2009, in mid-crisis, when it was “managed by depression”.

The audience reflected the buoyed sentiment: almost half (43.7%) of those polled thought the euro interest rate will be +25bps by the end of the year, while only 9.3% thought the rate would be lower than it is today. The summit attracted between 400-500 people, majority of which bankers with a smaller number of corporate representatives.

Paul Camp, global head of cash management financial institutions, Deutsche Bank, continued with the upbeat message, highlighting the fact that the global recession is officially over, but made clear that world is in a state of extreme volatility. “In 2009, trade and payment volumes contracted for the first time since 1982. The low interest rates depressed profitability,” he explained. Yet in many ways this was not all bad news for transaction banking for its products were more fully appreciated by the C-suite.

He said that “growth is back, but from very depressed levels” in 2010. “Interest rates will increase eventually. However, regulatory pressure is intense and our clients have become more demanding, while at the same time wanting lower prices for services. In order to grow, we need to investment. We are in a year of transition,” he predicted.

During the first roundtable discussion, however, both Rajesh Mehta, treasury and trade solutions head, EMEA, Global Transaction Services, Citi and Pierre Fersztand, global head of cash management, BNP Paribas, identified the cracks still present in the financial system. “For banks, the big crisis is over; but for corporates, the crisis is not over. Corporates are still waiting for liquidity,” said Fersztand.

Mehta added: “We are not done with crisis. What happens when fiscal/monetary easing is withdrawn? The first shock wave has rippled through financial systems, but the real economy and fundamentals that gave rise to the crisis haven’t moved on. There are places where the aftershocks will be felt deeper and last longer. The growing part of world economy is now re-stocking its inventory.” He did agree with Camp’s opinion that the world is entering a transition period.

The Rise of the Asia – Focus on China

Significantly, this year IPS devoted a portion of the first morning to emerging Asia, with a particular emphasis on China. With an economy that grew by 10.7% in 4Q09, up from 9.1% in 3Q09, China is no longer ‘emerging’ but has established itself as a global player, with India not far behind. Additionally, last year China overtook Germany to become world export champion.

Linda Yueh, director of The China Growth Strategy, Oxford University, led off the discussion with the session ‘A Focus on Growth Markets – How Can Banks Capture the Opportunity Offered by the ‘Asian Century’?’. She highlighted the recent positive developments in the Chinese financial industry: capital market promotion, stock market reforms, growing convertibility of the renminbi (RMB), improvements in laws and regulations, and the opening up of the banking section through initial public offerings (IPOs) of nearly all state-owned banks.

But Yueh also looked at the challenges: the potential asset bubble from the US$1.3 trillion fiscal stimulus issued last year and also cheap money from the West. Another concern is the build up of non-performing loans (NPLs). She said that continued growth is not guaranteed and that interest rate reforms will be key for the region as a whole.

Spokespeople from three Chinese banks – Agricultural Bank of China (ABC), China Merchants Bank (CMB) and Industrial and Commercial Bank of China (ICBC) – participated in a roundtable on ‘How to Leverage Asian Growth Opportunities’. As Pan Kang, chief representative, CMB, says: “This is undeniably the best time in China – ever”, in terms of economic development and improved standard of living for millions of Chinese people.

But there are still big gaps between the urban and rural economic situation, according to Jijun Zhang, deputy general manager of the international department, ABC. He said that China cannot rely on foreign trade in the future but will need to stimulate domestic demand, particularly in the rural areas.

SEPA and the PSD: Not Much to Report

Almost half the conference audience (46.5%) thought that new regulations will have the greatest impact on transaction banking business in 2010. Only a fraction less – 45.7% – also viewed regulations and risk as the biggest constraints on transaction banking.

As Simon Bailey, director of payments, Logica, in an interview with gtnews, said: “No one wants to talk about regulations, yet everybody wants to talk about regulations,” meaning that most are fatigued by the sheer amount of talk around regulations – but a lack of action means the discussions must continue.

And the single euro payments area (SEPA) and the Payment Services Directive (PSD) typify this paradox.

Bailey said: “SEPA has been disappointingly slow. Of course, in 2008 most eyes were on other targets – none the least was basic survival. But there has been – and continues to be – a tension between political will and domestic and bank priorities. The question is: when do we want SEPA? The answer: in due course.”

IPS devoted two afternoon streams to SEPA and the PSD, as well as a standalone ‘PSD Boot Camp’ on the fourth day of the event. So what, if anything, is new?

Michael Thom, retail issues, consumer policy and payments systems, European Commission, gave the details of 10 countries that missed the 1 November 2009 deadline for transposing the PSD into national law: Belgium, Estonia, Italy, Lithuania and Slovakia should have completed the process by the end of February; while Greece, Poland, Latvia, Sweden, and Finland should all be transposed by the end of the year.

Gerard Hartsink, chairman, European Payments Council (EPC), said that the PSD transposition issues are not a “show stopper” for SEPA. Yet Michael McKee, partner, DLA Piper UK, said that there is a danger of a “three-speed Europe”, with some countries not ready until 2011 or even 2012.

The lack of an end date for the decommissioning of legacy payment instruments is a sticking point. Thom said that “all the ducks are in a row” for the proposal of an end date, and yet no concrete proposal has yet been made. Optimistically, Jonathan Williams, director of communications and product strategy at Experian, believes that an end date will be set within the next six months.

27 views

Related reading