Liquidity Dominates Risk Concerns for Corporates

One of the major effects that the credit crisis has had on corporate treasury is the wide amount of risks that the function has to manage. In 2010, gtnews carried out research into this trend – looking at areas such as liquidity risk, the effect of risk on treasury within organisational structure, counterparty risk, foreign exchange (FX) risk, interest rate risk and financial crime – as well as asking corporates which risk they perceived as the top risk to be mitigated and managed in the next year.

Six hundred and one corporates took part in the research, providing a comprehensive set of results. Respondents came from a cross-section of company sizes – most respondents came from companies with revenue of between US$10-500m (29.5%), closely followed by those with revenues of US$1-10bn (29%). The next most represented group was companies with annual revenues of more than US$10bn. A large majority of respondents to the Treasury Risk survey came from one of three regions – western Europe (37.3%), North America (28.8%) and Asia-Pacific (18.1%)

Liquidity Risk on the Wane?

For the first few years of this century, cheap liquidity was easy to come by if you were at a company with good credit ratings – whether this was through bonds, commercial paper, notes or uncommitted bank facilities. The credit crisis had the effect of abruptly cutting off many of these options, with costs also spiralling. So a couple of years after the credit crisis hit, we were keen to understand just how easy it was now for corporates to access liquidity. The results show a rather mixed picture.

Forty-two percent of organisations reported that it was easier to access liquidity currently compared to 12 months previously. Another 28% noticed no change in access to liquidity, while the remaining 30% consider it more difficult to access liquidity than 12 months ago.

Table 1: How Easy is it to Access Liquidity Compared to 12 Months Ago?

Much easier 11%
A little easier 31%
I’ve noticed no change 28%
A little harder 21%
Much harder 9%

Source: gtnews Treasury Risk Survey 2010


This split between those organisations finding it easier to access liquidity and those who aren’t is played out across different regions. A majority of organisations in the Asia-Pacific region report easier access to liquidity currently compared to 12 months ago (58%) while 50% of organisations in Latin America found it more difficult. In North America, 38% of organisations report that access to liquidity is easier currently than a year ago while, at the same time, 26% found it harder. These results were closely mirrored by western European respondents, where 37% found liquidity easier to access, but 32% found it more difficult.

The mix in results may lead one to suspect that the size of an organisation is critical when it comes to ease of accessing liquidity. However, the Treasury Risk survey suggests that this is not the case. Forty-two percent of larger organisations – companies with annual revenues between US$1bn and US$10bn – indicate it is easier to access liquidity today compared to a year ago, while 31% found it more difficult. A slight trend can be argued when looking at the results from the largest respondents – with annual revenues of US$10bn or more – where 52% found it easier to access liquidity than 12 months previously, while 23% found it more difficult. The same percentage of smaller companies – those with annual revenues below US$10m – report that access to liquidity is easier than it was 12 months ago as those between US1-10bn did (42%), while 32% found it more difficult.

Overall there is a slight trend towards liquidity being easier to access for some corporates, but these results also show that corporates still face a struggle to access liquidity and the conditions that existed before the credit crisis remain a distant memory for most. It is likely that corporates are experiencing a variety of different conditions from banks that they are striking up new relationships with in the effort to manage counterparty risk.

Treasury structure

The 2010 Treasury Risk survey sought to find out the level to which firms had changed their treasury structure, if at all, as a result of the liquidity risks posed by the credit crisis. During the credit crisis itself, it was reported on gtnews that companies that had once had a decentralised approach to cash management, funding and hedging were centralising these activities to improve control over cash flow, reduce the cost of funding and manage credit, interest rate and FX risk more effectively. Had this continued into 2010? The Treasury Risk survey asked corporates if they’d changed their treasury structure in the previous 12 months in order to manage liquidity risk.

Fifty-two percent of respondents had not changed their treasury structure over the past 12 months. This leaves nearly half of all respondents making some change to their treasury set-up. One-third said that they had changed their treasury structure as a result of liquidity risk – 28% becoming more centralised and 5% becoming fully centralised. Another 11% of respondents made changes to their treasury operations unrelated to the liquidity risk they faced.

Table 2: In the Past 12 Months, Has Your Treasury Structure Changed as a Result of Liquidity Risk?

Become fully centralised 5%
Become more centralised 28%
Become more decentralised 4%
Become fully decentralised 0%
There’s been change, but for another reason 11%
No change 52%

Source: gtnews Treasury Risk Survey 2010


Looking to the future, the Treasury Risk survey indicates that a large majority of organisations feel they have made the necessary changes to ensure their treasury department is able to successfully manage liquidity risk. Eighty-two percent of organisations indicate they will not make any change over the next 12 months. Only 16% report they plan to further centralise their treasury operations, while the remaining 2% indicate they would decentralise their treasury operations.

Efforts to improve cash flow forecasting being made

Accurate cash flow forecasting and information on liquidity reserves are critical for corporates if they are to ‘expect the unexpected’. Inaccurate or untimely data can lead to a string of surprises that can heighten liquidity risk and leave treasury in a dangerous position. And judging by the response to the Treasury Risk survey 2010, organisations are responding to this challenge.

Seventy-seven percent of organisations indicate that they have improved their cash flow forecasting system within the past year. Within this number, 35% took steps to improve both accuracy of their data and their forecast window (by forecasting further ahead). Thirty-three percent solely focussed on improving the accuracy, while 9% took steps to forecast further ahead.

Table 3: What Steps Have You Taken to Improve Cash Flow Forecasting in the Past Year?

Improve accuracy 33%
Forecast further ahead 9%
Improve accuracy and forecast further ahead 35%
No change in cash flow forecasting system 23%

Source: gtnews Treasury Risk Survey 2010


The majority of organisations within each region changed their cash flow forecasting system within the last 12 months. Fifty percent of Latin American organisations improved both accuracy and forecasting, while a further 36% put in place efforts towards improving one or the other. Most effort was made by organisations in the Middle East and Africa – 45% of respondents here improved both accuracy and forecasting, while another 48% devoted efforts towards one or the other separately. In Asia-Pacific, 44% improved both accuracy and forecasting and 36% improved one or the other. Thirty-six percent of North American companies improved both, while this number dropped to 32% for companies in western European countries. One explanation for these figures could be that firms in western Europe and North America had more sophisticated cash flow forecasting systems in place before the onset of the credit crisis and, as such, felt slightly less need to change their way of operating once liquidity risks were raised.

Post-credit crisis, the Treasury Risk survey 2010 shows that a majority of organisations believe they have a suitable cash flow forecasting system in place to mitigate liquidity risk concerns. Sixty-three percent do not plan to change their cash flow forecasting process in the next 12 months. More than one in five (22%) plan to improve only accuracy or forecasting, while 15% still target improvements in both concurrently.

Counterparty Risk of Banking Partners High on Corporate Agenda

One of the most noticeable effects of the credit crisis for corporates was for those with direct or indirect exposure to financial institutions that collapsed, were bought cheaply by rivals or required state support to remain in business. Organisations faced the prospect of losing credit lines or having to renegotiate lines they were dependent on for much higher fees.

Corporates were well used to carrying out counterparty risk analysis on other organisations they dealt with – for example, suppliers – but the shock of the credit crisis meant that this now also became a top priority for their banking partners. And the Treasury Risk survey highlights the fact that this trend has continued after the credit crisis as corporates pay close attention to the credit ratings of their banks. An overwhelming majority of organisations regularly review their banking partners’ credit standing. Half of all organisations review credit standings at least quarterly, with 27% carrying out a review on a monthly basis. Six percent review every six months while 15% percent annually review their banking partners credit standings. A further 20% review on a ‘random’ basis. Only 9% conduct no review at all.

Table 4: How Often do You Review the Credit Standing of Your Banking Partners?

At least once a month 27%
Quarterly 23%
Every six months 6%
Annually 15%
Randomly 20%
Do not review 9%

Source: gtnews Treasury Risk Survey 2010


Larger organisations (with annual revenues greater than US$1bn) are more likely to review bank credit standings on either on a monthly or quarterly basis than smaller companies. On average, 53% of these larger companies review standings either monthly or quarterly, compared to 43% of those organisations with revenues of less than US$1bn. And the process still has a way to go, according to the Treasury Risk survey, with one-third of respondents saying that they plan on increasing the frequency with which they review their banking partners’ credit standing to some degree.

Late settlement from bank partners infrequent

Over the past 12 months, organisations very rarely (if at all) experienced a late settlement from a banking partner. Just three percent indicated their organisations regularly experienced late settlements from their bank partner. Sixty-two percent report having never experienced a late settlement, while 11% experienced a late settlement once. Twenty-four percent experienced a late settlement only occasionally.

Primary Objective for Hedging Strategies

Corporate priorities for hedging strategies can cast light upon the current markets that they are operating in and, just as importantly, business confidence. The Treasury Risk survey discovered that the primary objective of an organisation’s hedging strategy when managing FX risk was to protect the organisation from adverse markets, with 62% of respondents selecting this option. The next most frequently cited objective was hedging at the most favourable level to gain a competitive advantage (11%). This suggests that corporates are overwhelmingly still thinking to protect what they have, rather than chasing growth.

Table 5: What is the Primary Objective of Your FX Hedging Strategy?

Protect the organisation from adverse markets 62%
Hedge at the most favourable levels to gain competitive advantage 11%
Organisation does not have an FX hedging policy 20%
Other strategy 7%

Source: gtnews Treasury Risk Survey 2010


This thought is further backed up by the fact that 73% of survey respondents indicate that they have not changed their approach to FX risk management in the previous 12 months. In addition, 21% say that they have made moves to protect themselves from adverse moves in the currency market, while just 6% have become more optimistic and thus made moves to gain competitive advantage through their FX hedging strategy.

Organisations with annual revenues greater than US$1bn were more likely than smaller companies to have maintained the same FX risk management strategy (average of 76% percent versus an average of 69%, respectively). Also, smaller organisations tended to change their strategy to become more conservative (24% average) versus large organisations (19% average).

Hedging tools

Turning to hedging tools used to mitigate risk, the Treasury Risk survey looked at which methods are most popular when it comes to hedging interest rate risk. Over two-thirds of respondents – 72% – use swaps for this purpose. The next most popular method was forward rate agreements, used by 38% of organisations.

Focus in short-term investments

Before the credit crisis, corporates looked for potential yield in short-term investment instruments as the key factor in deciding where to place their cash. However, as many of the money markets collapsed and credit lines were threatened, organisations were far more focussed on the liquidity and security of cash. This is still the case, judging by the results of the Treasury Risk survey. When making short-term investments, security is the most important consideration for a majority of organisations (60%). Liquidity followed as the second most important (31%) while yield was only chosen by 9%.

Critical Risks to Manage in Next Year

Organisations view liquidity, FX and counterparty risk as the most important risks for treasury to manage above other risk types during the next 12 months. A quarter of organisations view liquidity risk as the most critical, followed by FX risk (23%) and counterparty risk (17%). Less frequently cited risks include:

  • Interest rate risk (14%).
  • Operational risk (10%).
  • Investment risk (7%).
  • Financial crime (2%).

Organisations in the Asia-Pacific, central and eastern Europe, Latin America, the Middle East and Africa and North America regions all indicated liquidity risk as their top risk to manage over the next 12 months. Those in western Europe ranked FX risk as the top priority (26%) followed by liquidity risk (24%), which could well reflect the difficulties currently faced by the euro.

Both small and large organisations were most likely to identify liquidity risk as the most critical risk to manage over the coming 12 months. Beyond that, a greater percentage of small organisations consider interest rate risk and investment risk as a top priority over the next year while large organisations are more likely to be concerned with managing counterparty risk (19%).

What is certain is that risk management will continue to be a major burden for corporate treasurers through 2011. Liquidity will remain a precious commodity, while FX markets may still remain volatile. You can read thought leadership pieces on the wide variety of risks that treasurers face here. Later this year, gtnews will carry out the 2011 Treasury Risk survey, the comparison data of which will track the trends that have been seen in these results and highlight how corporate risk management is evolving.


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