Shock absorbers

Liquidity management has understandably ranked high on the list of bankers' concerns ever since the financial crisis. This concern peaked in August when the Committee of European Banking Supervisors (CEBS) announced the results of the stress tests that it had imposed on 91 European banks in order to ascertain the extent of their capital reserves and whether their liquidity levels could withstand further market shocks.

Given this attention on liquidity management, it is unsurprising that treasury services within banks and suppliers of treasury technology are now offering a range of liquidity management services to their corporate clients.

An example of such technology is provided by technology vendor Wall Street Systems (WSS), which has devised a stress test for corporates that includes 10 hypothetical scenarios, such as a 10% depreciation in main trading currencies, the insolvency of a top-three customer or supplier and a 25% increase in interest rates on a variable debt rate. The WSS stress test also asks what percentage of the company's debt will need to be rolled over or replaced in the next 12 months, the amount of finance extended to top customers and how quickly a company would be able to identify and replace all the relationships it has with one of its banking partners should there be a run on that institution.

"Banking stress tests have taken place in the US and Europe and the question arose of whether you could apply the same stress tests to a corporation," says Tom Nelson, cash management specialist at WSS.

A diverse world

Obviously, the corporate world is far more diverse than the banking industry and any stress test would have to go beyond the simple measures involved in the banking tests. Even the 10-point list of scenarios devised by WSS would have to be open to variation if it were to be truly applicable to any corporate.

For a comprehensive stress test, a corporate would also have to go beyond the typical ratio analysis, scenarios and cash forecasts that it may already conduct and beyond the measures it may already have in place to deal with the requirements of regulators and credit rating agencies. A corporate would also have to apply the test across its entire enterprise.

Despite what some of the more sophisticated companies may already be doing, Mr Nelson believes few are looking at liquidity on an enterprise-wide basis.

"Some do it on a siloed basis, such as for hedge accounting purposes, but not many will look at the interconnectedness," he says. "For example, if interest rates go up, what effect does this have on the debt portfolio or the hedge accounting portfolio? What about their customers and what about the cost of debt? It is all interconnected but we believe that many corporates are not looking at it this way."

For banks and other lending institutions, the provision of liquidity is vital and therefore increasing capital reserves to cover a number of extreme market scenarios is a necessary cost of doing business, hence the need for liquidity stress tests such as those set by the CEBS and the US Federal Reserve. But can corporates be expected to carry out such tests to an equally thorough extent and, in these cash-strapped times, to increase their capital reserves to cover hypothetical scenarios?

"All of these measures, from trading partners to taxation, affect liquidity," says Mr Nelson. "You want to have an accurate short- and long-term forecast of liquidity so that there is enough in terms of capital reserves - to honour supply chain obligations, to meet debts on a timely basis and to cover payroll and so on.

"If I were to encourage corporates to go through with this [stress testing], I would point them to the examples of companies that have failed because events took them by surprise - a company that seemed solvent was suddenly gone."

Meeting demand

Regardless of whether corporates choose to subject themselves to such stress tests, there is clearly a growing demand among corporate treasurers for more liquidity management services and intraday cash management facilities that are available on a constant and global basis, according to Mark Gunning, business solutions director at core banking system vendor Temenos. "There is an increased professionalism among corporate treasurers and they are demanding more information and transparency around their cash management from the banks, who are in turn demanding it from us in the software that they buy," he says.

Whereas five years ago a corporate treasurer may have been comfortable with overnight information and consolidating global cash positions once a day, this is no longer acceptable, says Mr Gunning.

"Corporates expect their banks to consolidate their cash positions, particularly any international bank that holds more than one of the corporate's accounts. And they want to move funds constantly, from one international branch to another," he says. "An international corporate is never closed, so it does not expect its bank to be closed. They also expect banks to be able to consolidate positions held with other banks - taking statements from other banks and incorporating them into the single view of liquidity that they present to the corporate."

Tom Nelson, cash management specialist at WSS

Challenge for banks

This may seem a lot to demand from a bank, particularly as so many institutions are working with legacy systems and departmental silos and have a more muddled infrastructure than the average corporate. But if a bank has systems and infrastructure that reflect the global, 24/7 products it offers, then it is easy to provide these single views and, possibly, even generate some revenue from them, says Mr Gunning.

"In some instances a bank can charge for this kind of service and for certain electronic banking features," he says. "But on the other hand, these [customers] are global corporates and their liquidity is very valuable to banks, so I think in time these services will become a commodity offering and a cost of doing business. Maintaining a global cash management business is a challenging and expensive task, so it is no surprise that the players in this market are a handful of tier-one international banks."

One exception among the handful of big cash management players is Bank Mendes Gans (BMG), a Netherlands-based bank owned by ING that has focused solely on liquidity management for the past 10 years, eschewing the basic processes of traditional cash management such as domestic payments and cheque handling in favour of providing netting facilities and cash pooling on a global scale.

"Corporates are looking more closely at liquidity because of the high cost of borrowing," says BMG's chief operating officer, Jan-Pieter Pak. "By implementing a notional or global cash pool, a corporate will reduce its cost of borrowing enormously by making better use of internally available cash," says Mr Pak.

Cash shortfall

For a company operating in a market such as Russia or China, it can be difficult to get hold of cash generated in these countries. Transfers may be allowed but this exposes a corporate to currency risk and there are expensive transaction and trading costs.

It is also advisable to avoid internal company loans because of the cost and labour involved. But by implementing a notional cash pool, these funds can be made available without the cost, complexity, resources or risk. A cash pool also makes cash balances very visible and this enables corporates to have better control over their liquidity and to set and enforce certain thresholds.

There are some challenges in implementing a cash pool, depending on the existing structure of the corporate. For example, a corporate that has already centralised its treasury operations will find it much easier to encourage all of its international subsidiaries to join the cash pool. And a corporate may find that it has to expend significant financial and labour resources if it wants to link the cash pool to any existing enterprise resource planning technology, depending on the openness of the existing technology.

BMG also offers a browser-based platform for managing the cash pools and Mr Pak says the development of online and browser-based technology has been key in the advancement of liquidity management services, particularly for multinational corporates. "If we implement a cash pool for a corporate with entities all over the globe, it can be quite a challenge to have all those entities working in a standardised way. But with a browser-based platform, access to the system is that much easier, and it is easier to enforce a standardised way of working," he says.

Of course, the current high cost of borrowing and the scarcity of credit have helped to focus corporates on the need to manage their own liquidity and extract as much value as possible from the assets they hold internally, but is there any concern that this focus will diminish once better market conditions arrive and credit becomes more available? "I think everybody knows that what happened two years ago can happen again, because a lot of those risks still exist," says Mr Pak.

"A cash pooling service reduces a lot of these risks - there is less reliance on individual banks - as well as making cash more available. A cash pooling system should also come with a dashboard that enables corporates to track all their cash assets and react quickly to any market changes. So even if credit conditions improve, I cannot see corporates getting rid of this dashboard. I believe that any corporate operating on a global scale should be using a cash pool."

Craig Busch, group treasurer, WorleyParsons

Cash mobilisation

WorleyParsons, an Australia-based engineering company that operates in 40 countries, operates a centralised treasury system supported by five regional treasury managers in order to harmonise the group's cash mobilisation process and facilitate the use of sweeping or netting to maximise the use of funds and reduce the dependence on banks, says group treasurer Craig Busch.

WorleyParsons has also implemented a global forecasting template over the past 12 months in order to improve the company treasury's working capital planning and the use of in-house banking facilities by the group's subsidiaries.

"We run a weekly ALCo [asset and liability committee] call with each region to ensure that the group treasury stays close to the forecasts and to identify short- and medium-term funding requirements and the subsequent movement of cash," says Mr Busch. "The ALCo call also assists in maximising the quality of forecasts, which really improves the level of detail when planning short-term and medium-term cash requirements."

Although the company is bolstering its in-house capabilities, it still relies on its banking partners, especially those that have adapted their services to the online, automated and standardised platforms that corporates are increasingly adopting.

"The banks' online system uploads are critical in our capital planning process, as it is great to have forecasts but you need to know that cash has actually hit the account," says Mr Busch.

Messaging standards

However, banks that want to stay in liquidity management and meet their corporate customers' demands will also have to take greater notice of financial messaging standards such as Swift and the extent to which corporates are relying on these standards to solve their connectivity issues.

"Swift is something we are currently reviewing, along with the role that Swift can play in connecting to many banks through a single pipeline, the possible reduction in inefficiencies and improved speed at which we receive bank balances. An objective with any review of the cash process is to streamline the number of bank accounts and as a result reduce the cost of banking across the group," says Mr Busch.

The trend towards using Swift communications has been duly noted by BMG, says Mr Pak. "I think this use of Swift and a standardised form of communication between corporates and banks will increase over the next few years," he says. "Indeed, we are already seeing some of the larger corporates forcing large international banks to conform to their standards and not the other way round, which has traditionally been the way things have been done."