Risk, Regulation and the Rise of Asia: Corporate and Bank Perspectives

This year the EuroFinance International Cash and Treasury Management conference was held in Geneva between 6-8 October. The economic situation is Switzerland is comparatively healthy when viewed alongside some other European countries, but what of the global economic outlook for the next year? This was the theme of the opening session of the conference, with Daniel Franklin, executive editor at The Economist, interviewed by Anne Boden, head of Europe, Middle East and Africa (EMEA), Global Transaction Services, RBS, on ‘The World in 2011’.

Boden described how she had found paranoia about emerging markets on recent visits to the US. Franklin pointed to the fact that this is a permanent shift, which was accelerated by the credit crisis. He encouraged delegates to look beyond the BRIC countries of Brazil, Russia, India and China, and also be more discerning with opinions towards emerging market countries. I think this comes from a certain desire in the west to rush to acronyms and paint largely diverse emerging economies as the same.

Turning to risks for the year ahead, and Franklin’s main concern is protectionism. He used to the US as an example for his fear – unemployment is stubbornly high and some in congress are calling for harsh trade measures in order to protect jobs in the US. The main focus of this ire is China, with the perception that it is manipulating the price of the renminbi in order to have a trade advantage. Franklin stated that China doesn’t respond well to threats, but at the same time would not want a trade war with the US.

Turning to Europe, and Franklin dismissed the chances of the euro breaking up as no more than a 10% likelihood – believing the political will to hold the euro together will overcome any current disgruntlement in various of the member states. However, the mechanisms within the eurozone for coping with economic crisis need to be much more robust, with the various sovereign debt woes and the value of the euro standing testament to the fact that safeguards were not strong enough in the past.

Many of the economic themes that Franklin discussed have been subject to direct political influence during and in the wake of the credit crisis. Franklin named political risk as the biggest risk faced over the next 12 months, stating that he believes this gives a 30% chance of the much-touted ‘double-dip’ recession. For example, some tax cuts introduced by former-US president George W Bush are coming up to their expiry date. Looking at the political polarisation in the US, and the possibility of next month’s midterm elections delivering a split Congress, these cuts may be unable to be reinstated, which in turn could strike a blow against consumer spending levels.

Turning to business, Franklin named three key trends:

  1. Competition from the emerging markets is increasing – even in the corporate world.
  2. The global nature of business is only intensifying, be it in the talent pool, or where business operations are based.
  3. There’s a focus on having both of the key factors that create enduring success for business – scale and agility combined. Many companies are good at achieving one or other of these, but the two together offer a much greater challenge.
Asian perspectives

Picking up on a theme common in this first session, a panel discussion on the second day added some extra detail to the Asian analysis. Damian Glendinning from Lenovo, based in Singapore, made the point that many of the delegates in the conference hall might find themselves working for a Chinese or Indian company in the near future. This is one example of the rapid corporate growth taking place in Asia. And it’s not only in the talent pool where this growth and competition is being found.

Glendinning pointed out that a large number of western corporate are viewing Asia, and China in particular, as a ‘honeypot’ and there is a scramble to become involved and create a presence in these markets. Faced with this competition in their home market, an increasing number of Asian corporates, led by those from China, are rising to the challenge and taking the fight to the west by competing aggressively in these traditional western home markets. Glendinning used this example to illustrate the point that delegates need to understand the fact that perspectives in Beijing on the global economy and corporate world can differ from the perspectives held by those in London or Paris, for example, and that entities in the western world would benefit from trying to gain an insight into these alternative perspectives.

David Blair from Huawei, based in China, described some of the challenges of being a western group treasurer of a Chinese corporation. “They call us the ‘grey hairs’,” he joked, referring to the young and ambitious domestic workforce that are driving innovation in Chinese corporations and their thoughts on working for somewhat older western treasurers. Blair explained how Huawei has to have a very tight set of financial controls in place in the company, with most cash being centralised and not ‘in the field’, something he described as being very necessary when the workforce is young and eager. And, as Franklin mentioned in the opening session, this competitive nature is something that those in the west are just going to have to get used to.

Regulatory Thoughts

Paul Simpson, Citi – The regulatory framework is unpredictable at the very least – Dodd-Frank, anti-money laundering (AML), emerging payments. A lack of liquidity is enhancing the focus on supply chain finance. Also, global cash flows are changing, which can be attributed to the growth of the BICs.

Marilyn Spearing, Deutsche Bank – We’re wading through regulations, like it’s a new religion. And this is not just in the US with Dodd-Frank, but in Europe with things such as SEPA [single euro payments area] too.

Tony Richter, HSBC – There’s a need for European governments vocally to support SEPA migration. The recent example of France switching the vast majority of its public finance payments to SEPA instruments is a lead that others around Europe should be looking to follow in order to boost the scheme.

Anne Boden, RBS – The impact of regulations on the banks and the knock-on effect on their corporate clients is key. With Basel III, are we regulating the crisis we just had instead of focussing on current issues? Also, many regulations don’t look at the interlinked nature of banks.

Risk, Technology and the Role of Banks

gtnews has published a number of articles about the growth of risks that treasurers are tasked with managing since the credit crisis, particularly areas such as counterparty risk and sovereign risk. It is here that treasury technology can be a key facilitator for treasurers, and this was a topic that I discussed with Vanessa Manning, corporate director, market manager, EMEA, international cash management at RBS.

Corporates are seeking end-to-end visibility over their value chain, in a way that is synchronised and visible, rather than in the silos that bank offerings can tend to come in. Manning made the point that the technology available today allows this to be possible. And while budgets are tight, the opportunity to outsource these capabilities exist. “Software-as-a-service [SaaS] has never been cheaper, and it is globally available,” said Manning. With the options available multiplying in number and versatility, corporates are looking to multibank channels, as opposed to proprietary banking technology.

Turning to 2011, Manning described how there will be a continued focus on both standardisation and modularisation, with agility and mobility of systems being key to corporates during this time. Corporates want to track areas such as processing flows and connectivity, and are comparing and contrasting the performances of their different relationship banks thanks to the multi-bank portals that exist today. The user-friendliness of the new technologies will also play a large part in corporate adoption in the coming year, according to Manning. “This has to cover the complete online account,” she explained, and pointed to the trial of the SWIFT 3SKey (PDI) in France as an example of the interest in developing user-friendly interfaces.

User friendliness is a key reason that electronic bank account management (eBAM) is such a hot topic for both corporates and banks right now. Speaking to Paul Wheeler, managing director of Wall Street Systems, he explained how for corporates, eBAM will become a ‘must have’ utility over the next couple of years and it will be seen as part of the standard treasury kit. On the bank side, the advantage of eBAM is the efficiency it brings – compare having to change the signatory on 300 accounts of one of their corporate customers manually via paper authentification, to the ability to do this online. With pressure coming from both sides of the corporate banking relationship to get this technology evolving, progress will be swift.

The next development for eBAM revolves around the developing SWIFT standards in this area. Wheeler explained how Wall Street Systems is playing a part in the next trial, which is aimed at getting multiple corporates sending information into a bank, and then the bank responding back to the corporates. In terms of the developing market in eBAM vendors, Wheeler described how this is adding momentum in the move to establishing eBAM. At the same time, he was bullish about his own company’s chances of maintaining a strong presence in the market: “At the moment there’s lots of noise, but when corporates and banks become more educated about the types of offerings that are describing themselves as ‘eBAM’, some vendors will fall away.”

A main challenge that Wheeler sees facing eBAM is the difficulty in making it multibank. This is something that Wall Street Systems are counselling the banks about, but the move towards multibank could slow the adoption process. Wheeler commented that SWIFT needs to be strong on this issue to ensure the process doesn’t become bogged down.

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