Speaking to around 200 participants, 45% of whom were treasury professionals, Francois Villeroy de Galhau, global head of French retail banking at BNP Paribas, illustrated what a key role risk has played in the credit crunch. “Risk is key to this changing world for three reasons,” he said. “First, risk is the root of the financial crisis. Some of the parts of the financial system forgot that there is no credit without risk. You can divide risk, sell it, transfer it, but it doesn’t disappear. This simple fact was forgotten. The second reason is that managing and controlling risk is key to the robustness of all players involved – banks and corporates. Finally, cash management is a powerful tool in monitoring risk, which is a bit new for cash management because it was seen in the past as more of a technical skill. It has now become a more strategic skill for a company trying to monitor risk.”
He said that in the past, the BNP Paribas chairman was known as the most risk adverse banker. “In Europe, Michel Pebereau is probably seen as the most risk conscious banker. Two or three years ago, people said that BNP Paribas was a bit boring and too risk adverse, but this is one of our strengths in the present climate,” he affirmed.
Dr Linda Yueh, fellow in economics at Oxford University, was clear in her presentation on ‘Risks, Globalisation and Emerging Markets Specificities’ that the ruptures in the global marketplace were not going to subside anytime soon. She believes that the world hasn’t seen the end of the exposure to financial instruments, such as credit default swaps, because the real economy effectively lags behind the financial crisis. “We are going to see at least 6-18 months of fallout. An upturn in the global economy will not happen until 2010 or 2011,” she predicted.
However, she was more optimistic in terms of avoiding a ‘Great Depression’. “I think that policy makers are finally on top of the crisis,” she said. “There are two main tools used by economic policy makers: fiscal policy and monetary policy. Fiscal stimulus packages have been seen, for example, in US that equates to 1% of GDP; Germany invested 2% of GDP; and, most recently, China has committed a package of 8% of GDP for the next two years. This is usually a good approach, but given the high level of indebtedness in the US and UK, this consumption push has to be through increases in real income, not prolonging crisis through increased borrowing. Monetary policy is the preferred tool, but there is a global inflation problem. A couple of months ago, we were worried about stagflation, but we are now more worried about deflation. If you continue to cut interest rates and reach 0%, then there is no where to go – that means you will be in a deflationary trap if growth doesn’t pick up.”
Ahead of this weekend’s international economic summit in Washington, Yueh says that the most positive outcome of the financial crisis would be a new international financial architecture – a rules-based system. She cautioned against regulators going too far with restrictive measures that will possibly curb innovation.
Regulatory changes are another area of risk that corporate treasurers have to be aware of. In a session regarding updating the international financial reporting standards (IFRS), Vincent Le Ballac, partner at PricewaterhouseCoopers France, warned that accounting rules are changing fast and the International Accounting Standards Board (IASB) is under tremendous stress to urgently change. “There is a significant possibility that new amendments and modifications could arrive before the end of the year,” he said. “As of today, it is not clear what set of rules we will use to write up the accounts at the end of this year.” He said that the best way forward for treasurers was to keep it simple. “Use simple instruments and keep your strategy simple – these days that is a good decision to make in both accounting and risk management,” he said.
Francois Masquelier, senior vice president treasury and head of corporate finance at RTL GROUP and board member of the European Association of Corporate Treasurers (EACT), who spoke about simplifying hedge accounting, backed up this viewpoint. As fair value reporting is under much scrutiny, he said: “Using simple products because you can more easily use fair valuation; as soon as you start using complex products, you need to improve your management/measurement systems.”
In her session, ‘The Challenge of Operational Risk in a Global World’, June Yee Felix, general manager global banking solutions at IBM, laid out the case for improving systems’ integration to get an overview of risk. She also contributed advice from IBM’s corporate treasurer, Jesse Greene, who said the big message was how important it was to test all assumptions continuously. The fundamental questions, which are normally taken for granted, need to be answered and challenged on a constant basis: Do you have your cash in the right places? Do you have sufficient sources of capital, access to commercial paper? Where is your business going and how best to position myself? Are you prepared for all the changes that are occurring at this volatile time? In terms of contingency plans, Felix pointed out that it is not enough to have a Plan A and B, but today you need C, D and E as well.
Damien McMahon, PricewaterhouseCoopers Belgium, in his session on ‘Enhancing Internal Controls with your Treasury Management Systems’, summed up the answer to the question that all corporate treasurers are asking themselves: how to get funding for such fundamental change? “The credit crunch should be used as a lesson. The technology is already there, as well as the best practice in terms of controls. We just need to use this focus to get the budget in order to use as much of the functionality that currently exists and put in place the controls that exist. I think that we will never get a better opportunity to get in front of the board and get the resources to do that other than right now,” he said.
He advised giving the executive board the worst-case scenario and taking the current market and excerpts from the Financial Times to use as scare tactics. “You need to go to the board and say that they may think this is a lot of money to invest in a small department such as treasury, but if they don’t, their losses can be even bigger,” said McMahon.
When it comes to the relationship between Europe and Britain – uniformity isn’t a word that currently springs to mind. And that’s not just a reference to Brexit. Whilst the Europe and Britain do find themselves in the midst of a political break-up – their monetary policies are also showing signs of divergence.
Europe’s introduction of the General Data Protection Regulation (GDPR) next May will have implications for businesses around the world and US corporates should start getting ready if they haven’t already done so.
The recent NotPetya cyberattack underlined the need for organisations to address their exposure and how to mitigate the risk.
As anticipated, US organisations exited prime money market funds en masse following last year’s SEC reforms. AFP’s latest Liquidity Survey indicates what it will take to encourage them back.