Current crisis conditions have highlighted the role of corporate treasury departments in managing risk. But while their profile has increased, investment in the right tools and training is often lacking, as James King reports.


These are difficult times for corporate treasurers. The Covid-19 pandemic has hit the global economy hard, while geopolitical tensions resulting from the health crisis (as well as those running parallel to it) have stoked volatility in foreign exchange (FX) markets. Meanwhile, zero-to-negative interest rates are spreading throughout much of the developed world, at a time when regulatory reform and the impact of technology are remodelling the corporate treasury operating landscape.

These dynamics are presenting a host of new challenges and opportunities for treasury professionals around the world. But above all, they are highlighting the need for robust and adaptable risk management frameworks. 

An exceptional environment

This focus on risk management stems from the unprecedented nature of the contemporary political and economic environment. Though recent years have thrown up a broad array of difficulties, from the global financial crisis to the UK’s Brexit vote, most industry insiders concede that current conditions are exceptional. “I don't think we've seen quite the same depth of impact across various different risk factors, from FX market volatility to supply chain risks, as we are experiencing today,” says Andrew Hollins, director of corporate treasury proposition at Refinitiv. 

As a result, over the past 15 years, the profile of corporate treasury departments has risen dramatically. Among both small and large businesses today, corporate treasurers now have a seat on the top tier of company leadership. In a 2019 survey conducted by global software and technology company FIS Global, more than 100 treasury professionals were asked about the growing influence and responsibility of their profession. About 68% of respondents said their treasury departments had grown in importance and were taking on more responsibility than in previous years, to varying degrees. 

“The Covid-19 pandemic is yet another event, along with Brexit and the global financial crisis, that has definitely elevated the status of corporate treasury as being a critical function in an organisation. Really, it has given treasurers the need and the opportunity to move from having a tactical and operational role, to more of a high level and strategic role,” says Karlien Porre, partner and treasury advisory lead at Deloitte UK. 

The strategic dimension of corporate treasury is only likely to grow as the constellation of risks facing companies – and the wider economies in which they operate – expands. For starters, the spread of low interest rates is forcing some corporate treasury teams to tackle an issue in which they have no prior experience. “Euro area interest rates have been negative for some time but now we are talking about zero or negative rates in pounds and dollars. This means that treasurers who have not had that experience with negative rates need to be thinking about how to deal with this challenge,” says Paolo Esposito, director of Deloitte UK’s treasury advisory team. 

Beyond this, volatility in currency markets has also emerged as a source of risk. In its 2019 Global Treasury Survey, Deloitte engaged with more than 208 companies to determine the key challenges facing the profession moving forward. FX volatility was the third most important strategic challenge for treasury organisations, behind liquidity in second, and visibility into global operations, cash and risk exposures in first place. Most treasurers are seeing volatility across most currency pairs, including traditionally stable pairings. 

“What we have seen is that some corporates have been caught off guard by these events and they have taken a reactive approach. Other companies have taken a more proactive approach, by reviewing their existing policies and within that context taking a more quantitative approach to risk management,” says Mr Esposito. 

Risk management skills 

Questions of how corporate treasurers develop effective risk management frameworks now lead discussions around the profession. This is underlined in HSBC’s 2019 Corporate Treasury Report, which revealed new risk management techniques are cited among the most important skills and competencies required by corporate treasury departments – while also being the most-cited examples of the industry’s skills gap.

So while new technology and third-party services are opening up new ways for corporate treasury teams to mitigate the risks they face, some seasoned observers believe that getting the fundamentals right is just as important.

“A good risk management framework is all about getting the basics right and understanding the risks. You can make tactical decisions about how far forward you hedge [a currency] for example, or whether to hedge a particular currency, but you need to have the right framework in place and to make it dynamic enough to adapt to how the business and the world is changing,” says Naresh Aggarwal, associate director in the policy and technical team at the Association of Corporate Treasurers. 

Some observe different approaches to risk management, depending on the size of the company. Ms Porre at Deloitte UK notes: “My view is that I don’t think there’s been a wholesale overall change to risk management. The way I would articulate it is that companies are on a maturity journey to gradually get more sophisticated and improve the way they conduct their risk management.”  

Nevertheless, new technologies are shaping the way in which corporates manage risk. “One thing that has changed and has improved is the tools, technologies and processes that companies can deploy to actually understand their exposures,” says Ms Porre. As a result, new techniques are emerging that are helping treasurers to get a better understanding of risk at a more granular level throughout a company. In particular, the use of quantitative analyses can offer clarity across different dimensions of a business. 

“What we see as a growing trend is portfolio-specific analyses. Corporates are asking themselves: what does a specific event mean for my risk and for my profit and loss? Or they might have a portfolio of hedging instruments, a portfolio of loans and a revolving credit facility. What do they look like under different scenarios? What we’re seeing is a real appetite to run crisis-type stress tests,” says Mr Hollins. 

Constrained budgets

Nevertheless, in many cases treasury teams are not receiving sufficient investment to augment their technological capabilities. This, according to some observers, comes down to the relatively small size of treasury teams compared with other departments within a business. “It’s really interesting that when you look at companies’ total budgets for financial systems investment, the amount that treasury needs is relatively small. And yet, in some cases, treasurers are not even receiving that small percent of the total budget,” says Ms Porre. 

Meanwhile, new technology and service providers are also helping to illuminate the wider business landscape for treasurers, particularly their connections with relationship banks. With many corporate treasurers presiding over multiple banking relationships, gaining greater market visibility on pricing, for example, can be particularly helpful for smaller businesses, which tend to have a lower number of these relationships.

“Something that has emerged, and is emerging more, is the ability to see into the cost of doing business with a corporate’s relationship banks. That’s something that we’re looking at much more now, that insight into the transaction cost analysis,” says Ritu Singh, global head of sales readiness for corporate treasury at Refinitiv. 

Widening gap

As the economic fallout from the Covid-19 pandemic gathers pace, the nature of corporate treasurers’ banking relationships may ultimately be one of the most defining features of the crisis.

“In 2008 and 2009, the world experienced a financial crisis. So it was really the corporates looking at the banks and thinking ‘do I really want to do business with this entity?’ Now, the crisis is the real economy and the situation is reversed. Moving forward, we are going to see the chasm between big corporates and small and medium-sized enterprises widen in terms of what funding they can get and what spreads they are being given,” says Ms Singh.

Although it is too soon to determine the ways in which the current environment will reshape corporate treasury moving forward, the sector in general is set for rapid evolution. To meet these challenges successfully, treasury professionals must be both creative and adaptable. In tandem, the banking community, as well as other service and technology partners, will have a vital role to play in facilitating the development of treasury departments over the next decade. 


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