Turning up the heat in the cash management space

The role of the corporate treasury has become more strategic in recent years, with treasurers gaining more recognition from the boards of their respective organisations. Likewise, cash management – and the bankers who provide the services – have steadily gained an elevated status in the years since the financial crisis. 

Corporate treasurers and transaction bankers alike need to make the right connections, which is the theme of this year’s cash management guide. The article on technology looks at emerging technologies and making the connection between what is possible today and the future implications of these technologies. Regulation continues to be a theme for the cash management industry, and there has been particular focus on Know Your Customer (KYC) and anti-money laundering (AML) regulations, which require banks to connect the dots in terms of who they are doing business with, as well as monitoring transaction data. The final article looks at connecting with clients, and how traditional correspondent banking has moved toward a model of client centricity. 

Strategic battleground

With the client at the centre of the banking relationship, more emphasis has been put on the specific needs of corporate treasurers, which now have more strategic importance in their organisations. A survey by the Association for Financial Professionals (AFP) found that 84% of respondents said that the role of corporate treasury has expanded over the past five years, and 83% expected the role to continue to expand over the next five years. This increased importance is down to the fact that more attention is being paid to liquidity and risk at the board level of corporates, the survey found. It is also true that treasurers now have closer access to their organisation’s executive committee than they did in previous years. 

The reason for the increased visibility of corporate treasury has been attributed to the unique characteristics of the economic environment since the financial crisis. The continued low-interest-rate environment has seen treasurers under pressure to be more creative in the search for yield, and corporates have also been hoarding cash in recent years. The allocation of this cash has become a strategic battleground, according to the AFP survey.

The pace of corporate cash accumulation has slowed, however. The AFP notes that businesses in the US have been expanding this year, and are no longer holding on to cash, a trend that is expected to continue. The AFP’s corporate cash indicator survey showed that, in April 2014, the indicator had dropped by 15 points – on a year-on-year basis – to measure plus five on the scale of corporate cash accumulation. At the same time, corporates have become more aggressive with how they invest their cash holdings, with that measure increasing by six points from the year before. 

When interest rates will rise again, and what impact this will have on pricing and organisations’ ability to do business, is a much-debated topic. Conversations around this topic were being held this time last year, but what was not on the horizon last year was the topic of negative rates.

In June 2014, the European Central Bank (ECB) became the first central bank to introduce negative interest rates when it cut the deposit rate for banks from 0% to -0.1%. The negative rate only applies to bank deposits left with the ECB, which is intended to spur banks to lend instead of leaving their deposits overnight at the central bank. The action came as part of a series of measures that also saw the benchmark interest rate reduced from 0.25% to 0.15% and banks being offered long-term loans at favourable rates in a bid to spur growth and prevent deflation. 

How this will impact corporates and their cash management remains to be seen. It is possible that the negative deposit rate – i.e. charging banks for keeping deposits overnight at the central bank – could filter down from the banks into charges for their customers to keep deposits. For cash management banks, it is becoming more important for them to capture additional business; rather than just accepting a client’s liquidity and deposits, they are focused on adding other transactional business to make the client relationship stickier and more profitable.

Turbulent times

The wider economic environment continues to be challenging for corporate treasurers and transaction banks. Growth in developing countries has been disappointing and there continues to be debate about China’s slowing economy and whether its shadow banking system poses systemic risk. Aside from watching the performance of the world’s major economies, there are also hotspots of concern that could also impact business sentiment. 

This year has seen the ratcheting of tensions in various parts of the world. In Ukraine there are concerns the crisis in the Crimea will escalate and destabilise relations in the international community. For now, the business world is keeping a close eye on whether sanctions will be widened, which will impact any corporate or financial institution that seeks to do business with Russia. 

Instability in Iraq – since insurgents have taken key cities – is another example of how political uncertainty can adversely impact business sentiment. Aside from the devastating impact to local civilians, the wider business implications are the impact on oil prices, given that Iraq is the second largest exporter out of the Organisation of the Petroleum Exporting Countries and any halt in its production will likely see a spike in prices. 

The geopolitical situation across the world is constantly changing, with corporates and banks having to keep a close eye on the developments. Corporates and banks alike need to keep monitoring the ever-changing sanctions list and make sure they are not transacting with entities that are banned in their jurisdiction. Keeping up to date with such regulations is a complex endeavour. While KYC and AML regulations seek to restrict business, there are other regulations that have been introduced in the past year that have the opposite effect. 

Renminbi moves

The Chinese authorities have continued to liberalise the controls on its currency, the renminbi. The People’s Bank of China – the country’s central bank – has been taking a step-by-step approach in introducing reforms that will enable the internationalisation of the renminbi. In the Shanghai free-trade zone a number of measures have been introduced. For example, relaxations have been allowed so that companies in the free-trade zone can borrow in renminbi from outside China and companies are now able to sweep their excess renminbi, which would have previously been trapped in China, and put it to use in their operations outside China. Relaxations such as these are subject to certain conditions, but overall they signal the intention of the Chinese authorities to liberalise the currency. 

Another development in the internationalisation of the renminbi has been the appointment of a clearing bank in London. Previously, the UK’s financial centre piggybacked off Hong Kong’s clearing bank, which had extended its operating hours to accommodate the London time zone. Now, China Construction Bank has been appointed as London's renminbi clearing house, which signals the UK’s intention to become a major international financial centre for offshore renminbi. 

The use of the renminbi has been growing and, in June 2014, the Society for Worldwide Interbank Financial Telecommunication’s renminbi tracker noted that offshore renminbi growth had gained traction in the US, which had jumped ahead of Taiwan in the rankings of offshore renminbi clearing centres. Between April 2013 and April 2014, the US’s renminbi payments value increased by 327%, which shows how the currency is gaining ground outside the traditional clearing centres such as Hong Kong. 

These developments show how corporate treasurers and cash management professionals are increasingly facing a world that will no longer be dominated by the US dollar. But, rather than thinking about the renminbi displacing the US dollar, many in the industry frame the developments as a move toward a multi-currency world that gives companies that trade with China more efficiency in their transactions.

Developments such as these add another dimension to the increasingly complex and strategic role that the corporate treasury has.