As 2007 draws to a close, it is an appropriate time to reflect on what has happened in the past 12 months and the challenges banks and corporate treasurers have faced. The meltdown in the US sub-prime mortgage market in August was undoubtedly the most significant event of 2007; the repercussions of which are set to continue well into 2008.
The Liquidity Squeeze
Almost six months since the industry first became aware of the extent of the sub-prime mortgage crisis, announcements from global investment banks about their billion dollar losses continue to hit the headlines. While some banks are turning to sovereign wealth funds and their deep pockets for help, others are working hard to minimise the number of assets they have in structured investment vehicles (SIVs). These instruments, which buy commercial paper (CP) in order to invest in asset or mortgage-backed, higher-yield securities, are at the centre of the current crisis.
SIVs are essentially off-balance sheet vehicles that allowed banks to be exposed to complex re-packaged asset-backed securities despite the credit risk involved. As a result, the credit crunch has raised questions about whether financial institutions should be able to manage risk through their own models, whether the credit rating agencies are playing an appropriate role in assessing securities risk, and concern that the current regulatory framework is flawed.
The recent market turbulence has certainly brought the way the industry rates risk under the spotlight, and this is something that the upcoming Basel II framework will seek to address. The framework sets out a minimum standard for capital adequacy in order to improve existing rules by aligning regulatory capital requirements more closely to the underlying risks that banks face. Whether Basel II would have made a significant difference either in preventing current problems or in resolving the trouble that has emerged if it had come into effect earlier is discussed in the gtnews commentary, Rising Tide of Regulation: How is the Industry Coping?. The importance of Basel II has been further underlined by current events and the Basel Committee on Banking Supervision has affirmed its goal to ‘strengthen supervision and risk management practices as well as improve the robustness of valuation practices and market transparency for complex and less liquid products’ going forward.
Significantly, the credit crunch is just as distressing for corporates and institutional investors who must continue to evaluate their liquidity and investment management programmes in order to ensure they have an effective risk policy framework in place. According to Mark Allen, at GSAM, what remains crucial is that every investor needs to think carefully about where they place their cash. “Risk management and capital preservation, as well as truly understanding what is bought, will remain vital going forward,” he advises in the Q&A, Past, Present and Future.
The events of the past few months provide a stark warning that the risk associated with the strategies and business models banks employ should be considered and evaluated more carefully in future. This is a task that regulators, central banks, financial institutions, governments and banks must all take responsibility for in the long term.
ABN AMRO Takeover
The battle to buy ABN AMRO has been another headline-grabbing story this year. As 2007 unfolded, it looked like Barclays would succeed in its friendly takeover of the Dutch bank but then the Royal Bank of Scotland (RBS) consortium swooped in at the eleventh hour with its bid to launch a hostile takeover of ABN. The RBS consortium comprising RBS, Santander, the Spanish banking group, and Fortis, the Belgo-Dutch group, eventually succeeded in their bid at the beginning of October.
The consortium plans to break ABN AMRO intro three parts and a series of senior management appointments are likely to be announced over the coming weeks. This will be a stressful time for ABN executives who have reportedly not been involved in discussions about the organisation’s new structure.
According to industry experts, the ABN deal is the most significant European banking deal to date because it demolishes the ingrained belief that large European banks cannot be forced into a deal against the wishes of their management and that large banks are too complex to be broken up1. There are already rumours about the likelihood of another high profile takeover next year, as a result of the ongoing pressure from the liquidity squeeze.
The need for banks to implement effective growth strategies was highlighted in the gtnews commentary, A Strategy For Future Growth: Banking Challenges and Trends, in August this year and this has become even more pertinent now. One positive outcome is that corporates may find themselves in an increasingly influential position when it comes to negotiating their requirements and expectations with banking partners.
The corporate-to-bank relationship is evolving from the traditional service provider and customer bond to one of increasing partnership. The trend towards centralisation and the reduction of bank relationships, as well as the commoditisation of price, means that banks, more than ever before, have to compete on quality of service and their relationship management skills. This is a factor that corporate treasurers and CFOs should take advantage of in order to make sure their banks provide the cash management and working capital tools and support they need.
Hot Topics on gtnews in 2007
There are now 6,364 articles in the gtnews archive across all sections and almost 500 were published this year. Against the backdrop of the liquidity squeeze and changing industry dynamics, what articles have proved to be the most popular among all readers?
Most Read Articles in 2007 (All Readers)
3. Three Steps to Good Bank Account Management by Chris Sunderman and Eelco Kaan, Rabobank, 29 May 2007
5. The Best Kept Secrets in Supply Chain Finance by Santander, 26 June
6. The Specifics of Letters of Credit by Suresh Vaze, freelancer, 2 April
7. Achieving Operational Best Practice in a Corporate Treasury by Patrick Coleman, IT2 Treasury Solutions, 26 March
8. Working Capital Management from a CFO’s Perspective by Leo Schuld and Kyrill Bouwman, Deloitte, 17 April (6715)
9. Bank-to-corporate Connectivity: The Next Stage by Joergen Jensen, Wallstreet Systems, 16 August
10. SEPA: Get Ready in 2007 by Robert Heisterborg, ING, 22 January 2007
Source: gtnews Reader Database (12 December 2007). This list reflects the cumulative reads of each article as of 12 December 2007. The longer an article has been on the site, the more likely it will have a higher number of reads therefore the date of publication of each article should be taken into consideration when looking at the list of most-read articles.
Cash Management Remains a Priority
An article about effective global cash management tops the list as the most-read article among this year. The ultimate goal of any corporate treasurer is to make sure the company’s liquidity is handled as efficiently as possible using the most advanced technology as well as ensuring there is transparency, control and integration across all systems and cash management operations. Effective cash management has, however, become more complex as treasurers contend with the fact that their role is expanding into more strategic working capital management.
“The treasurer’s role has become more complex as companies have globalised and corporate cash balances have grown,” says Peter Knight at HSBC Investments in his article,
His advice to corporates is to instill the following five principles in their global cash management strategy:
- Manage cashflows effectively.
- Forecast cashflows accurately.
- Tranche cashflows intelligently.
- Establish an appropriate investment policy.
- Implement effective investment management.
While these principles might seem self-evident to any corporate treasurer, it is worth bearing in mind the complexity of cash management and that what is accepted as best practice might not be as easy or straightforward to implement. Just consider cash flow forecasting – the ability to forecast accurately is not disputed – yet many treasurers still rely on Excel spreadsheets for this function because it is a tool of habit eventhough it is notoriously inaccurate and error-prone. In fact, 72% of the corporate respondents in the cash management survey this year admitted they still use spreadsheets to forecast their cash flow compared to 62% in 2006. Read more about the results in Is Corporate Cash Management Changing?
The cost of implementing treasury best practice can also be an obstacle. “It’s unlikely that anyone would say that implementing best practice in treasury operations is a bad idea, however, corporates may in the past have judged that the costs of doing this were prohibitive,” says Patrick Coleman at IT2 in his article, Achieving Operational Best Practice in a Corporate Treasury, number seven in the most-read list. “Today, SOX-driven auditing, and a general acceptance of the value of transparent control, are powerful advocates for implementing best practice solutions, scaled and configured to fit specific corporate environments.”
He explains that a best practice-based corporate treasury uses controlled, transparent processes to drive, manage and document treasury workflows. “It is important to the treasurer not only to be sure that daily tasks are performed punctually, accurately and completely – they must also be clearly seen to be properly accomplished and documented,” he says.
Implementing best practice and an effective working capital strategy is not just the treasurer’s responsibility though. In the eighth most-read article of the year, Leo Schuld and Kyrill Bouwman, from Deloitte, discuss the role of the CFO, which they say “has changed dramatically in recent years.” In their article, Working Capital Management from a CFO’s Perspective, Schuld and Bouwman argue that, in order to develop and maintain an optimal working capital strategy, the CFO first has to have a “profound grasp” of the business. “The key is to identify the main value drivers and the way that they affect the relevant financial performance indicators. One way to detect the main drivers is to perform a business analysis,” they say. “When the main drivers are clear, the CFO can formulate a strategy to streamline the key value drivers and the related processes in order to maximise value. From a financial point of view, the goal is to have sufficient cash available to settle current financial obligations as well as minimise the cost of keeping excess cash available.”
Identifying which working capital processes are efficient is an important part of any business strategy. One process that has always proved challenging is accounts receivable (AR), and this is the subject of the fourth most-read article of the year by Peter Cunningham at Citi.
In his article,
Cunningham acknowledges the fact that the AR function is more difficult to manage than AP but that “without doubt, the time is right for companies to be focusing on the optimisation of their AR – potentially into a central function.” Centralisation and the establishment of shared service centres are certain to be two key trends that financial institutions continue to investigate and implement within their cash management and working capital operations.
Progress Towards SEPA
Another significant talking point this year – and one that will gain even more momentum in 2008 – is the introduction of the single euro payments area (SEPA). The aim of SEPA is to create a borderless banking and payments environment within the eurozone. The second most-read article of the year,
The rollout of the first SEPA instrument, the SEPA Credit Transfer (SCT), on time and according to schedule in January 2008, is highlighted as a success and heralds the start of this ambitious initiative. The delay to the original schedule in the adoption of the Payments Services Directive (PSD), however, is described by Gerard Hartsink, chairman of the EPC, as a source of risk, cost and uncertainty to the SEPA programme. “We urge all those involved in the development of the PSD to complete the process of adoption and transposition as soon as possible and reflect in the final text the operational needs of the payments market in a practical and effective way,” he says. “A stable legal and regulatory environment will be critical to the success of SEPA.”
Hartsink points out that it is “essential that the SEPA Direct Debit (SDD) is underpinned with an effective level of legal harmonisation in force in SEPA countries”. A major setback as a result of the PSD’s delay is, therefore, that the SDD will also be delayed – most likely until 2009.
A further concern highlighted in the article is the lack of commitment and support from public administrations as adopters of the new SEPA instruments. “Clearly, the adoption of SEPA payments by public administrations remains a fundamental element in the migration process,” argues Hartsink.
This point was also raised in the 10th most-read article of the year, SEPA: Get Ready in 2007, by Robert
Heisterborg at ING. “Public authorities have a significant role to play especially as they will potentially be among the first adopters,” he says. “To increase progress and reduce the migration period, the EPC is calling on public authorities to act as role models for end-users in their adoption of SEPA instruments.”
His article outlines concerns around the migration period – when existing payments instruments will co-exist with the SEPA instruments to allow the gradual migration of users. “This migration period will be an expensive time for banks,” he says. “As a result, one of the biggest concerns among banks and other stakeholders is how to ensure the migration period is as short as possible and that consumers and corporates do actually adopt the new SEPA instruments.”
In 2007, there has been limited action within the corporate community in terms of preparation for SEPA. This is probably due to the fact that SEPA is another issue in a myriad of challenges every corporate faces, as well as the fact that uncertainties, such as the delayed SDD, have discouraged corporates from moving ahead with their implementation plans. The success of SEPA will depend on the fast adoption of the new instruments; this will be the biggest challenge for banks next year.
Development of the Bank-to-corporate Relationship
As mentioned earlier, the dynamics of the bank-to-corporate relationship is evolving and one of the most fundamental factors is quality of service. This is explored in the third most-read article of the year, Three Steps to Good Bank Account Management, by Chris Sunderman and Eelco Kaan at Rabobank. “Having a close relationship with the client and having a high quality process internally can make life a lot easier for both parties,” they say. According to Rabobank, three steps are vital in the client/bank relationship when it comes to bank account management:
- Customer due diligence – bank accounts are under the close scrutiny of the regulators and corporates must comply with stringent requirements that banks can help with.
- Implementation – banks should provide guidance and support across the entire account opening and management process.
- Ongoing security and user identification – there is a high risk of fraud in the financial services industry today and so corporates must make sure they have effective policies to prevent financial crime, such as having a system in place to spot irregular payments into an account or the segregation of function/duties within the organisation.
“Opening and managing a corporate account should be a straightforward process, but this depends on the corporate’s needs and the structure of the accounts they require,” affirm Sunderman and Kaan. “The process involves many security measures – maybe more so now than ever before, given the strict regulations on banking and corporate governance, and compliance with anti-money laundering and financial crime prevention legislation.”
A further significant development in the bank-to-corporate relationship is corporate access to SWIFT. The co-operative welcomed corporates onto the network in 1999 through the original model, treasury counterparties (TR-CO). The Member Administrated Closed User Group (MA-CUG) model was introduced in 2002 and since the beginning of 2007; corporates have had a new model to access SWIFTNet, the Standardised CORporate Environment (SCORE).
SCORE is one of the issues discussed by Joergen Jensen, at Wallstreet Systems, in his article, Bank-to-corporate Connectivity: The Next Stage, the ninth most read article of 2007. “There are high expectations that the introduction of SCORE will make it easier, cheaper and less risky for corporates to switch between banks because there should be no technical or format changes needed in switching banks,” he says. “Also, SWIFT is now promoting corporate connectivity to SWIFTNet more than ever.”
This fact was evident at SIBOS 2007, the annual banking event organised by SWIFT, which introduced the first Corporate Forum this year (read more in the gtnews commentary, Gaining Momentum at Sibos 2007). According to Jensen, easier access to SWIFTNet for corporates is definitely a good sign that banks are serious about making corporate-to-bank communication easier although he acknowledges the obstacles that still remain. “Time will tell whether these good intentions will also win on the format side,” he says. “Even with SCORE there is room for special agreements between banks and corporates that can lead to a dilution of the formats used and it does not look like that the SEPA format will be one common format for all European countries.”
Trade Finance and the Financial Supply Chain
The financial supply chain has been a buzzword this year, and achieving efficiencies in this area has risen on the agenda for all corporates. The traditional approach of pushing cost down the supply chain to other players is now regarded as a futile exercise and one that increases the likelihood of problems occurring along the financial supply chain.
“Corporates are increasingly purchasing their supplies from overseas markets, in order to benefit from lowest cost country sourcing, i.e. purchasing goods and services at the lowest possible cost,” explains Santander. “With the globalisation of supply chains, large corporates are realising that they need to be more collaborative and supportive in managing these extended trade relationships.”
In this article,The Best Kept Secrets in Supply Chain Finance, the fifth most-read article of 2007, Santander argues that collaborative supply chain management is becoming widely accepted as best practice. It notes that even with the growth in global trade, the documentary letter of credit is declining in terms of market share and that, according to the World Trade Organisation, more than 80% of global trade is now done on open account. “In this expanding open account environment, creative banks are finding a useful role for themselves in delivering supply chain finance and other value-added services to help their customers improve their working capital management,” the article says. It also considers reverse factoring, vendor financing, payables financing, receivables purchasing and trade payables backed financing, which all tend to be variations on the theme of the umbrella term supply chain finance.
Despite the use of letters of credit decreasing, it remains a relevant trade finance tool and this is highlighted by Suresh Vaze in the sixth most-read article of 2007, The Specifics of Letters of Credit. “Taking into consideration all the complexities of international trade and the requirements of both buyer and seller, one useful method of payment is by documentary credit or letter of credit (LC),” he says. His argument is based on the globalised nature of modern trading where buyers and sellers might not know each other, so the LC provides guarantee of payment that is not provided on open account. They also need to consider trade and exchange controls, legal systems, political entities and currencies. “When commercial parties to the transactions are placed in such complicated and complex situations, they adopt a mechanism for settlement of trade that is mutually convenient, reliable and safe,” he insists.
The pros and cons of open account versus letters of credit will continue to be debated in 2008 and highlights the fact that the financial services industry needs a range of techniques to suit the different evolving dynamics.
Bank and Corporate Focus in 2007
When we compare the most-read articles among banks and corporates, there are only three common articles in the top 10,
Outsourcing is the subject of the ninth most-read article among banks, Outsourcing in the Banking Sector: Problems and Prospects, where Santosh Patnaik at the United Bank of India discusses why outsourcing is becoming an increasingly important strategic decision for banks to consider. The introduction of SEPA has also heightened the focus on outsourcing, as many banks decide to move out of the payments business and outsource this function as a result of the high investment cost of processing payments.
The most-read article among corporates is Achieving Operational Best Practice in a Corporate Treasury, while articles about working capital and supply chain finance also proved popular, such as Working Capital Management from a CFO’s Perspective and
A Regional Comparison
When we compare the most-read articles among readers from different regions, we can also identify a number of region-specific patterns. For example, in western Europe, unsurprisingly, nine of the top 10 most-read articles are about SEPA, such as
North American readers show a greater interest in China with three articles in the top 10 about the country, Foreign Banks in China: Market Developments and Future Potential, Banks Turn to China for Supply Chain Financing and Opportunities and Challenges for Software Vendors in China, as well as a focus on bank-to-corporate connectivity developments.
The most-read articles among readers from Latin America, Asia Pacific and the Middle East and Africa reflect a wider range of subjects, perhaps evidence of the fast pace of development in these regions and therefore the need for information. Across all three regions, articles about risk management, FX trading, supply chain finance, credit portfolio management and bank account management are common themes, such as The FX Marketplace: Trends, Opportunities and Challenges, Implementing Active Credit Portfolio Management and True STP in FX Trading: Fact or Fiction?
The most-read articles of the year reflect the variety of challenges that face both banks and corporates in the area of treasury and cash management; as well as the extensive coverage of subjects on gtnews.
In 2008, recovering from the liquidity crisis will be the priority for financial institutions, as well as mitigating against such an event happening again. The recent co-ordinated provision of liquidity from the Federal Reserve, the Bank of England, the European Central Bank and the Swiss National Bank is another attempt to help alleviate current market stress; only time will tell how effective this initiative, and others, has been.
From a regulatory perspective, 2008 will also be milestone as we experience the launch of SEPA. It will be interesting to see whether more corporates start their preparation and implementation plans for the initiative; the level of interest among western European readers certainly indicates that this is likely. Institutions will also be getting to grips with the business implications of the Markets in Financial Instruments Directive (MiFID), which recently came into force, as well as the upcoming Basel II requirements.
Next year, gtnews will, as always, endeavour to cover the most important subjects for all readers. We also encourage readers to let us know what you think by using the ‘post a comment’ functionality on all new articles to provide feedback and post questions to the author. You can also rate all gtnews