Liquidity Risk Still Cause for Concern Among Corporate Treasurers

For the second year running, corporates have identified liquidity risk as the foremost challenge to treasury over the coming 12 months. The proportion of respondents that identified liquidity risk as their main concern actually increased from 25% in 2010 to 28% in 2011.

This result is of interest because more than half of survey respondents – 53% – indicated that their access to liquidity was “easier” over the past 12 months, compared to the 44% of respondents who indicated the same in the previous survey. The share that reported their access to liquidity was “harder” plummeted, from 30% in 2010 to just 13% in 2011.

On the other hand, the proportion of respondents who noticed no change in their organisations’ access to liquidity increased six percentage points, from 28% in 2010 to 34% in 2011.

Enrico Camerinelli, contributing editor, gtnews, believes that the growth in the “no change” population is a warning that the situation must continue to be treated with caution. “While the data clearly depicts a positive trend in terms of ease of access to liquidity, the increase of ‘no change’ votes shows that most of the preceding conditions have remained the same. This opens up a situation where it is the ‘harder’ access to liquidity that has remained unchanged,” he says.

It is worth noting that in growing and emerging regions – i.e. Asia-Pacific, central and eastern Europe (CEE), and Middle East and Africa – a higher percentage of respondents said that liquidity was “a little easier” to access. Camerinelli believes this is due to government-sponsored financing programmes that aim to provide financing relief to local companies, particularly for the small and medium-sized enterprise (SME) space (annual revenue less than US$500m).

These results leads to the conclusion that access to liquidity is quite patchy and that liquidity risk will remain an issue throughout 2011 and into 2012.

Market Risk: FX

Similar to last year’s results, foreign exchange (FX) risk was chosen as the second most important ongoing concern for the next 12 months. The volatility in the currency markets has maintained the importance of FX risk, with the majority of respondents from western Europe and the Middle East/Africa choosing this area as their top concern.

When managing FX risk, a majority of respondent organisations indicated that their primary hedging strategy objective was to protect the organisation from adverse market movements. Sixty-three percent of respondents cited this as their primary objective – very similar to the 62% who cited this reason in last year’s survey. Eight percent of organisations reported that they hedge at the most favourable levels in order to gain competitive advantage. This share is down three percentage points from last year’s results. One in five organisations indicated that they do not have an FX hedging policy.

“These results illustrate the widespread feeling that now is not the time to look for extra profit. The key objective today is to resist the pressures of financial distress and recover to more manageable conditions. The latest trends show, in fact, that FX is being used as a means to minimise financial risk,” says Camerinelli.

However, not all corporates have implemented a strategy to hedge their FX exposures. The gtnews 2011 Treasury Risk Management Survey found that well over a third of organisations based in the CEE and Latin America regions do not have a FX hedging policy.

Camerinelli expresses some concern at the number of organisations that do not have a hedging policy. “In a world with exponential growth in trade volumes, currency transactions are an integral part of the treasury responsibility,” he explains. “The recourse to ‘other strategy’ might partially reduce the level of concern because it testifies that corporations are taking care of the matter. Latin America is a good example of alternative hedging policies in the light of a missing corporate FX policy.”

Given the volatility in today’s FX market, many would expect companies to change their risk management strategies, but that assumption was not born out by the survey. The majority of organisations – 76% – maintained their same approach to FX risk as in the previous 12 months; however, 24% did change their approach. Eighteen percent of organisations became more “conservative” in their strategic approach to FX risk, while 6% became more optimistic.

“The impact of the crisis and the market volatility has certainly impacted companies in different ways depending on their size, and hence on their ability to counter market pressures with investments in resources, organisation and technology. The trend toward a more conservative approach reflects the caution exercised by treasury offices in taking care of the basics,” concludes Camerinelli.

Counterparty Risk

The third top risk to manage over the coming year is seen to be counterparty risk – this was true for both 2010 and 2011. The 2008 banking crisis highlighted the fact that, in addition to managing their own risk, organisations must also take into account risks associated with their business partners.

One way of doing so is by reviewing the credit standing of their banks. Most organisations review their banking partners’ credit standing at least once a year. Nearly six out of 10 do so at least every six months, with 22% reviewing quarterly and 27% reviewing even more often. A small percentage – 17% – of organisations does so randomly.

Camerinelli adds: “Anecdotal evidence shows that corporate treasurers are also looking at TMS [treasury management systems] as solutions that can help them anticipate counterparty risk by keeping abreast of payment habits, e.g. delays in payments, number of disputes, etc. Technology plays a significant role in supporting the review of counterparties.”

Corporate treasurers are now more sensitive to the ability of their banking partners to support them in the business. The reliability of credit rating agencies (CRAs) has somehow waned with the financial crisis and treasurers are looking at ways to measure the risk level of their financial partners with proprietary solutions. Other sources of information that respondents listed to measure counterparty risk of its banking partners include: credit default swap (CDS) spreads, share prices, financial profile, federal filings, and financial statements. Some also cited using independent broker analysis, as well as internally developed models and analysis.


The majority of organisations cited liquidity risk most often as the most important for their companies. Second was FX risk, and third was counterparty risk and operational risk. The first three were also the most important risks as cited in the previous survey.

Interestingly, the top three risk elements are also the ones that have grown in importance over the past 12 months. “This means that they are indeed the issues that keep corporate treasurers ‘awake at night’,” says Camerinelli.

The annual Treasury Risk Management Survey was conducted by gtnews between 11 February and 2 March 2011. The survey is based on 240 responses.

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Mark Carney Bank of England