About Me

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I am deputy editor at The Banker, a Financial Times publication. I joined the magazine in August 2015 as transaction banking and technology editor, which remain the beats I cover. Previously I was features editor at Profit & Loss, an FX and derivatives publication and events company. Before that I was editorial director of Treasury Today following a period as editor of gtnews.com. I also worked on Banking Technology, Computer Weekly, and IBM Computer Today. I have a BSc from the University of Victoria, Canada.

Thursday, 2 December 2010

TMS Functionality: Risk, SWIFT and SaaS

26 Oct 10

Today, treasurers are leaning harder on their treasury management systems (TMS) to provide an accurate, global view of their business. This article looks at the new functionality on offer, in a quest for the all-singing, all-dancing TMS. Includes the gtnews buyer's guide to TMS as a free download.

The uncertainty in the global financial markets has caused corporate treasurers many headaches, particularly regarding credit availability, monitoring and managing counterparty risk, and incoming regulations that might affect banking, tax and accounting.

Corporate treasurers are increasingly kept awake at night worrying about a lack of cash visibility and accurate cash flow forecasting. Limited control and transparency makes it difficult for treasurers to view their global cash position and optimise working capital across all their banking relationships. They need to get meaningful and timely information across a multitude of systems.

Kevin Grant, chief executive officer (CEO) at IT2, says that recent treasury trends can be broken down into pre- and post-global financial crisis. “Before the crisis, the focus was quite diverse and included straight-through processing (STP) and process management, different aspects of risk management, such as scenario analysis and VaR [value-at-risk], SOX [Sarbanes-Oxley] compliance, and new accounting regulations such as FAS 133, FAS 157 and IAS 39. The reaction to the crisis provoked quite a dramatic change, with the emphasis shifting to functionality supporting the new priorities of enterprise-wide cash and counterparty exposure visibility, which are, arguably, a shift back to basics.

“This new focus has encouraged higher levels of treasury connectivity with banks and internal remote business units, for example via SWIFT and corporate intranets, to ensure that complete and up-to-date information is collected from around and beyond the corporate enterprise,” he adds.

In addition, the treasurer’s role is expanding to include oversight in areas not hitherto under a treasurer’s remit. Paul Bramwell, senior vice president of treasury solutions for SunGard’s AvantGard, says that while the workload is increasing, the number of people to do the job remains the same or diminishes. He believes that there is a desperate need for automation tools to manage the redundant manual processes.

This is where treasury management systems (TMS) step into the picture. As Justin Meadows, CEO of MyTreasury, an electronic trading platform, says: “The TMS should be the golden system - the driving centre for treasurers and everything that they do. It needs to be fully integrated and be able to provide an overview of all data that the treasurer would want, down to the most detailed level and up to dashboard level, with warning alerts, etc.”

And many TMS vendors are responding to the challenge. Over the past two or three years, according to Paul Wheeler, managing director for Wallstreet Treasury at Wall Street Systems, the level of functionality has become functionally rich and more stable, even down to the lower end of the mid-tier in terms of products.
Improved Functionality

Three areas of new functionality that have made an impact in the past few years include:
Business intelligence, risk and reporting capabilities

Alongside a general back-to-basics approach, there is a re-emergence of concerns about risk management and the ability to identify and control those risks. As a direct result of the economic climate, greater pressure has been put on corporates to embrace the treasury’s role in risk at a business level. Up-to-date information is now required on demand.

Bramwell says: “There is a more consolidated focus on being able to identify where risks lie and treasury is using technology to automate the process of highlighting and identifying the risk. The platforms are there to identify exposures, whether that’s cash, FX [foreign exchange], interest rate risk or credit risk.”

Wheeler believes that the industry is beginning to find ways to get closer to the overall risk cycle of a business: “TMS vendors are beginning to embrace the fact that the treasury function is needing to holistically manage exposure across the broader business than just treasury. We see treasury’s remit expanding and it comes down to having very solid information around the total business, not just what historically might have passed through treasury.”
SWIFT connectivity

The crisis brought counterparty risk, in terms of banking partners, to the fore and therefore the opening up of SWIFT to corporates has to some extent relieved the reliance on bank proprietary connectivity. Corporates can now join SWIFT directly through a Member Administered Closed User Group (MA-CUG), Standardised Corporate Environment (SCORE) or Alliance Lite, or outsource their connectivity to a SWIFT service bureau. Corporates want to become more bank independent/agnostic and gain the ability to switch banks more easily.

According to Joergen Jensen, director at Nasarius, a cash and treasury management consultancy in the Nordic region, SWIFT is now becoming a standard way of integrating to banks, not just for corporate TMS but all payment systems. This point hits on the second reason why corporates are changing their bank connectivity - to improve the visibility of their cash across all their banks.

That enhanced level of connectivity allows treasury to be able to provide an ‘as real-time as possible’ view on exactly where its cash lies within the business. “I suffered through that in my previous life in corporate treasury,” says SunGard’s Bramwell, “where I just didn’t have access to those kind of balances, despite having subsidiaries reporting cash balances and local debt. The moment you find out that that level of reporting is inaccurate is when there’s a disaster.” He believes that SWIFT has been part of an improvement in visibility and accuracy.

SunGard is exploring the idea of a bank aggregation portal, where it uses SWIFT connections to provide a global view of a firm’s cash, beyond just what sits inside the treasury application. “Many companies want their subsidiaries to be able to remotely check their balances, search for outstanding transactions, etc, but wouldn’t necessarily want to give them access to a treasury application,” says Bramwell. “Therefore an aggregation portal is something that can be useful. It’s outside the core treasury application and can be deployed as a service in the cloud that’s hosted and managed by SunGard, for example, and used by corporates as and when they need it.”
Delivering via SaaS or cloud

Bramwell touched on the latest trend in terms of technology: software-as-a-service (SaaS) or cloud technology, where the TMS is hosted by the vendor, effectively outsourcing the technology and maintenance.

Wallstreet’s Wheeler explains: “Because there’s been significant retraction of investments around internal IT focus in treasury, treasurers have been left a lot more to their own devices to manage IT - some have even become IT specialists, certainly in the mid-tier. Therefore, many are keen to lean on the vendors to begin to take that burden away from them.”

Wheeler believes that the SaaS offering has matured so much in the crisis period that it is no longer a fad - it has become the norm. “Treasury won’t subside back to installed solutions,” he says. “Clients are saying that they are going to adopt this approach even more now that their budgets are opening out. They are beginning to look to the future.”

Many look to SaaS solutions as a quick way to deploy solutions to gain greater control. Martin Bellin, general manager of BELLIN, a web-based integrated treasury management platform used by Virgin Atlantic and Semikron, says that BELLIN’s fastest roll out was four weeks, but usually it takes about two to three months. “The idea is a web-based TMS, which can be deployed quickly and doesn’t require expertise to use,” says Bellin. “One of our partners calls it ‘glocal’ because it’s global and local at the same time.”
On the Cusp - Emerging Functionality
eBAM and personal digital signatures

SWIFT has been developing electronic bank account management (eBAM) and, hand in hand, personal digital signatures or SWIFT Secure Signature Key (3SKey), which enables eBAM. eBAM is a way for corporates to take control of their bank accounts and know who their signatories are, where they are, etc, effectively having all the mandates under central control. SWIFT has been working with banks and corporates in pilot programmes and launched eBAM in April, while it plans to launch 3SKey in October.
Commodity hedging

Commodities are something that an increasing number of corporates want to hedge and are therefore asking their TMS supplier to deliver this functionality. Nasarius’ Jensen says: “This is something where maybe five years ago treasurers were content - either they did not do commodity hedging or they were trying to manage it in Excel or with workarounds in their treasury system using FX instruments. But this was not a good solution because of its limited functionality, particularly with regards to reporting.”

Due to new environmental legislation, many corporate now want to trade CO2 emissions. “More companies suddenly want to be able to trade emissions and are asking for support within the system, particularly if they want to do hedge accounting,” says Jensen. “I think the systems providers are now adding more functionality to commodities on the instrument side and also in terms of handling the hedge accounting functionality, which is quite complex.”
Areas of Improvement
Cash flow forecasting

One area where treasurers are calling out for help is the whole world of cash forecasting. Zanders consultant, Mark Taylor, explains that it is so difficult to do because it is still heavily dependent on human input: “Forecasting is not a specific science, is it? It’s an art which uses statistical techniques and models, but different industry sectors, companies and people use different inputs and techniques.”

Speaking from experience, SunGard’s Bramwell says: “In my day in corporate treasury, one of the things that we were insistent upon was that we needed useful information in terms of forecasts, so that we knew what we were hedging. Because without forecast information, you are just guessing what you’re hedging, and you may actually end up creating exposures instead of reducing them.”

IT2’s Grant believes that the role of a TMS in supporting easier cash flow forecasting is to offer a user-friendly, web-based solution, ideally reflecting local style and terminology so that the forecast process is easy to use - and is therefore more likely to be used more effectively.

“Forecasting entities should certainly receive analytical feedback on their performance, and perhaps receive some kind of pricing benefit from the in-house bank for good forecasting performance,” he says. With today’s web-based technology and connectivity, barriers are more likely to be behavioural as opposed to technical, so treasurers need to communicate sensitively and interactively when rolling out a forecasting solution.”

Although previously treasurers might have had a transaction management package and then export data into a risk management system for valuations, for example, Jensen says that today treasurers expect everything in one package with integration across the whole group worldwide, as well as integration with the enterprise resource planning (ERP) systems.

But there is still work to be done in this area. Andrea Klein, vice president global financial services, Oracle, says: “TMS have been integrated with ERP applications, but this has been done through proprietary, custom integration. Thus, if a treasurer wants to change either the TMS or ERP on their side, or the bank wants to change payment applications or cash management systems on its side, the process is long and costly.”

Klein believes that building integration and ensuring data consistency across various systems has a worthwhile payback and return on investment (ROI) in terms of automation, controls, security, and better decision-making.

MyTreasury’s Meadows highlights that trading is a key part of what treasurers do - yet most TMS do not do multi-supplier trading. “They are more focused on the cash management side, trade booking, processing and confirmation matching, position reporting, etc. It is surprising that you can’t actually generate and execute a trade from a TMS, either through its own internal capability or by interfacing with a platform such as ours,” he says.

Today corporates set up trades within their TMS on the basis of the information there, and then simply export those to a trading platform where they are executed automatically. Once executed, they are inputted back into the TMS.

Some TMS vendors have integrated trading functionality. SunGard has its own SGN money market portal, for example, where a corporate can trade online for money market fund (MMF) investments. “As soon as you enter the trade, the transaction is brought into the system automatically; it’s confirmed, and settled automatically. And, of course, any balances are held within the TMS, as well as the trading portal,” says Bramwell.
The All Singing, All Dancing TMS

Zanders’ Taylor comments that vendors have long been racing towards an ‘all singing, all dancing’ TMS, which did everything that everybody wanted. This has been helped in some ways by consolidation in the marketplace; this year alone, Wall Street Systems bought both City Financials and Speranza Systems.

But the question remains, is a treasury better served by a vendor whose support team is covering multiple products, or is fully focused on one product? MyTreasury’s Meadows thinks that it is better to have specialist platforms and integrate them with TMS providers at the outset.

“If it is built in-house, then it will end up being the lowest common denominator and won’t address all the specialist needs. However, I can envisage a situation where the trading part is viewed as an integrated element of the whole treasury management function, and therefore is embedded within TMS. But I think it will have to be through the acquisition of a specialist supplier, and integration of that product into the overall product suite,” he says.

Should TMS providers look to be ‘all singing, all dancing’ or should they look more to interoperability and partnering? IT2’s Grant believes that the answer is both. “It is clearly desirable to have all necessary treasury management functionality available in a single system, and it is also necessary to integrate with complementary external systems,” he says. “Technically, the ideal may be pictured as a functionally complete TMS solution, based on a single central database that is updated in real time, robustly integrated with essential external systems. This approach minimises synchronisation and other technical, timing issues, and helps to assure that reporting is instantaneous, up-to-date and accurate, by eliminating unnecessary islands of technology.”

Oracle’s Klein reminds us that ERP vendors are expanding deeper into TMS territory: “ERP systems continue to take market share from legacy TMS providers as customers recognise that the ERP functionality improvements over the last 10 years now address most - if not all - of their core treasury requirements. In addition, they are starting to see that embedded integration offers tangible business benefits to both the treasury department and to IT. It makes sense to evaluate them as part of the TMS decision-making process.”

First published on www.gtnews.com 

Basel III: Is the Cure Worse Than the Disease?

7 Oct 10

The spectre of Basel III is making many - particularly bankers - very nervous. What effect will the new capital and liquidity rules have on the way banks do business and how will this impact corporates?
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Even in the midst of an avalanche of new regulations, the proposed capital and liquidity rules under Basel III are attracting a lot of attention. The fear factor is palpable among banks, regulators and national governments - what no one wants is for these new regulations to sign the death warrant of a shaky global economic recovery, fostering a ‘double-dip’ disaster.

Basel III is the successor to the New Basel Capital Accord (better known as Basel II), drawn up by the Basel Committee on Banking Supervision, an international alliance of the central banks of the world’s economic powerhouses. The Basel II Accord set out guidelines for minimum capital adequacy requirements for banks to promote the financial health and stability of the financial sector. Obviously it did not do its job, resulting in the biggest global financial crisis since the Great Depression.

Consequently, this reform package is the Basel Committee's third attempt at getting it right. Gordon Burnes, vice president, marketing at OpenPages, a provider of integrated risk management solutions, points out that the main difference between the two is that Basel III has a system focus, rather than an entity focus. “Global regulators are thinking about the system as a whole, as opposed to individual financial institutions, because Basel II didn’t contemplate the knock-on effects of an individual entity’s failure on the overall system,” he says.

Basel III’s aims are fourfold:

1. Increase the quality, quantity, and international consistency of capital.
2. Strengthen liquidity standards.
3. Discourage excessive leverage and risk taking.
4. Reduce procyclicality, a serious weakness in the Basel II Accord.

Importantly, the fourth point includes proposals for ‘countercyclical capital buffers’, a tool for strengthening the global banking industry. Patrick Fell, director of the regulatory practice at PricewaterhouseCoopers (PwC), explains: “Basel III is intended to be more countercyclical than Basel II, which means that the regulators want banks to set aside more capital in good times to cover bad times. From the point of view of lending, in an ideal world this would mean that the global economy would be less susceptible to booms and busts.”

According to the Basel Committee, such a buffer would force banks to increase capital when excess credit was building up in the market, a move that would be a brake on lending and create a greater cushion to protect against financial difficulty. The Committee sees countercyclical buffers as a way to manage the flow of credit into the economy and expects for them to only be triggered every 10 to 20 years.

In a statement on 26 July 2010, Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank, said that the Committee is on track to deliver a complete package of capital and liquidity reforms, stressing that it includes “design and calibration”, in time for the November 2010 G20 Leaders Summit in Seoul.
Critical Reaction from Financial Industry

But there is much concern across the financial industry that the cure will be worse than the disease, a point made by Gordon Nixon, president and chief executive officer (CEO), Royal Bank of Canada (RBC), speaking at the British Bankers’ Association (BBA) annual conference in July.

Nixon believes that these proposed rules, for all their good intentions, will negatively impact even the healthiest bank’s balance sheets in terms of capital, leverage ratios and liquidity, and as a result compromise economic growth. He said: “The proposals are so complex and onerous that we run the risk of an agreement that lacks transparency and integrity, or one that results in non-uniform implementation.”

Basel III has redefined capital and risk assets, effectively turning “swans into ugly ducklings”, according to Nixon. “Canadian banks, as an example, would be lifted from their position as well-capitalised, liquid financial institutions and recast as undercapitalised. Banks that passed the ‘real life’ stress test may fail the theoretical one - a pretty good indication of a flawed methodology.

“Basel III leverage rules use a very restrictive definition of capital and an overly expansive definition of risk assets,” continued Nixon. “The net result of doing so increases the leverage and would encourage banks to get rid of low-risk assets, such as insured mortgages, and replace them with higher-risk assets - hardly a way to reduce risk. Rational investment decisions made based on existing capital rules are, in some cases, now inconsistent with the proposed rules. And specific capital deductions in a host of areas will push banks to restructure in a way that could increase their risk profile.”

Although Nixon’s reaction may be more severe than some, the industry as a whole has voiced similar concerns. In mid-April, ratings agency Standard & Poor's (S&P) warned that if the Basel III proposals were adopted as proposed, they run the risk of creating unintended consequences for parts of the financial system, which could include constraining banks' lending activities and their ability to trade on derivative markets, hampering the inter-bank lending market causing displacements in markets for high-quality liquid securities, and encouraging banks to shift to short-term lending.

The transitioning period is also causing concern. Many industry experts and regulators believe that too fast a move to the new regime will have a detrimental effect on the global economy. S&P credit analyst, Richard Barnes, says: “There is still uncertainty about what the final shape of the rules will be and the transition period to them, but [the Basel Committee] is working to a fairly ambitious timetable to finalise things later this year. Although the timetable is solely for addressing the capital and liquidity situation, there are structural reforms such as resolution regimes, living wills, etc, which are going on in parallel.

“The transition period is such a hot topic because there’s a push from various quarters to allow quite a generous transition period so that the current fragile economic recovery doesn’t get derailed by banks having to adjust quickly to the new rules. Therefore, there is likely be a relatively long transition period which will enable banks to move to a new regime without having to adjust their balance sheets too sharply,” adds Barnes. The Basel Committee is making all the right noises on this issue, providing a protracted implementation timescale (see box).
Basel III: Transition to the Leverage Ratio

The Basel Committee has agreed to divide the transition period into the following milestones:

* The supervisory monitoring period commences 1 January 2011. The supervisory monitoring process will focus on developing templates to track in a consistent manner the underlying components of the agreed definition and the resulting ratio.
* The parallel run period commences 1 January 2013 and runs until 1 January 2017. During this period, the leverage ratio and its components will be tracked, including its behaviour relative to the risk-based requirement. Bank level disclosure of the leverage ratio and its components will start 1 January 2015. The Committee will closely monitor disclosure of the ratio.

Based on the results of the parallel run period, any final adjustments would be carried out in the first half of 2017 with a view to migrating to a Pillar 1 treatment on 1 January 2018 based on appropriate review and calibration. Pillar 1 deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk, and market risk.

Figure 1. Basel II Pillars
Source: Basel Committee on Banking Supervision

Will Basel III Have an Impact on Corporates?

Although an extended transition period will lessen a ‘shock’ effect on the global economy, the result of banks having to hold back a certain amount of capital which cannot be used for anything else means that there is not as much liquidity in the system. As Openpages’ Burnes succinctly puts it: “If you drive up the cost of capital, you will drive up the cost of lending, which will have a knock-on effect on global growth.” He points to a report by the Institute of International Finance (IFF), a global association of financial institutions, released in May, which made the argument that higher capital requirements would significantly reduce global economic growth. But he is not entirely convinced by this argument.

“It is to be debated because one could also argue that investors may charge less to invest in a more stable financial system,” he says. “The impact on corporates is that this is one part of a global wave of increased oversight by regulators on systemically significant entities, and that it won’t just be in the areas of capital that regulators will focus their attention. They will also look at areas of other areas of risk management within a company, for instance how is it assessing risk on a regular basis, how is it reporting on risk, how is it managing that data, and is it complying with the rules and regulations.”

PwC’s Fell examines Basel III from a different perspective, picking out the rules that deal with liquidity - liquidity ratio, leverage ratio and net stable funding ratio - which he believes could have a more direct impact on corporates. “The leverage ratio is potentially very important because it says that a bank’s total balance sheet cannot exceed more than a multiple of its capital,” he explains. “The latest Basel proposal envisages that a bank’s sheet can’t be more than, say, 30 times its capital, which is potentially a squeeze on banks’ ability to lend.”

The other important area is the net stable funding ratio, which requires banks to have more stable funding on their balance sheet. So, rather than taking in ‘hot’ internet-based deposits, banks should look for longer-term deposits from stable customers. According to Fell: "The bank liquidity regime is relevant from a treasurer’s point of view because banks may need to push out the terms of their borrowing and deposits to meet their new liquidity constraints. Treasurers may have to rebalance the terms and rates of their assets if they are to take advantage of this bank demand for longer-term deposits.”

Olivier Berthier, solutions director, transaction banking at Misys, argues that an issue that cropped up in the initial Basel III consultative paper was with the treatment of trade finance instruments. “There was nothing that excluded very low risk trade finance instruments from the increased regulation and constraints of Basel III and its objective to tackle excessive leveraging. Because of their off-balance sheet treatment, these traditional instruments would now be subject to a flat 100% credit conversion factor, a much worse situation than even their treatment under the Standardised Approach with Basel II.

“As it was the case with Basel II, it may be possible to define something specific for trade finance - because of the relatively low risk profile of these transactions - to justify less than the 100% conversion under Basel III. But the extra effort of such an advanced approach will be again reserved for the biggest players that can afford it, which means that local banks, particularly in the emerging markets, will likely be forced to follow a standardised model. As a consequence, the price for these transactions, the fees, the risk, the collateral, and the deposit expected from the corporate treasurer, might end up being that much bigger.”
Harmonised Implementation is Key to Success

Although there is a universal consensus that banks need more capital set aside to avert a future catastrophe, the debate is over what amount is deemed sufficient and the period for transition. Another big issue is how these regulations will be rolled out across the globe. Coming back to a point made by RBC’s Nixon, these complex and onerous regulations may result in a “non-uniform implementation”.

In a 26 July 2010 letter to the G20 Ministers of Finance, the IFF voiced its concerns over what it saw as problems with recent national and regional actions that are “not fully consistent with the degree of co-ordination that is necessary to assure a real improvement in global stability”.

“Regulators need to make use of appropriate flexibility to assure general international consistency in application of new regulations,” wrote the IFF. “The IIF supports the finalisation in 2010 by the Basel Committee of a properly calibrated and evaluated package of capital and liquidity reforms, introduced with appropriate transition periods, phasing and grandfathering… In particular, it would avoid serious unintended consequences that would derive from inconsistent regulation, such as an uneven playing field, unfair competition among financial centres, and incentives to regulatory arbitrage.”

Susannah Hammond, editor, regulatory affairs, Complinet, a provider of connected risk and compliance solutions, said: “One of the overall drivers is the need for a globally consistent approach on capital, so that there aren’t strong banks, in capital terms, in half of the jurisdictions and then weak banks in the other half of the world. This is going to be a difficult thing for the regulators to do. Basel II, for example, was implemented at different times in different places, and the three pillars that underpin Basel II were interpreted slightly differently in each jurisdiction.”

There is already a lot of divergence and nations are reverting to focusing on their own domestic battles. At the height of the crisis, the G20 was very much together in terms of regulatory coherence, but 18 months later the playing field is fragmenting.

PwC’s Fell harks back to the heyday of Basel I, the first global attempt to standardise the levels of capital in 1988. “The strength of Basel I, in particular, was the international consensus. With Basel II, it was more difficult but there was still there some level of harmonisation. Now with Basel III, it’s important that that consensus continues so we get comparability and a level playing field; we cannot have arbitrage between financial centres.”

OpenPages’ Burnes emphasises the threat of arbitrage. “Although these regulations require global co-ordination, it is going to be very tricky because there is much disparity between different countries. In the US, in particular, we have seen the downside of regulatory arbitrage and that is a real problem we have to avoid. You can’t have one territory that has lax regulation and allows a large global financial services player to operate in a completely under-regulated fashion because that would be not healthy for the global economy.”

First published on www.gtnews.com 

Global co-ordination is absolutely critical, however fraught with discussion and debate it is.

gtnews Global Corporate Treasury Awards Names Outstanding Treasuries

27 Oct 10

The gtnews Global Corporate Treasury Awards 2010, sponsored by Bank of America Merrill Lynch, paid tribute to treasury innovation that has contributed to the success of a corporate's business.

Around 150 people attended the inaugural gtnews Global Corporate Treasury Awards, sponsored by Bank of America Merrill Lynch, to find out who had proved best practice in contributing to the success of a corporate's business. The ceremony was hosted at Sibos 2010 in Amsterdam, in association with SWIFT.
gtnews Global Corporate Treasury Awards Winners

The winners and highly commended were:

Treasury Technology Implementation Project of the Year

Winner: AkzoNobel Treasury Transformation Project - IT stream

AkzoNobel, a multinational manufacturing corporation, embarked on a major treasury transformation project following the acquisition of ICI in 2008, which included: optimisation of the global transaction banking infrastructure; redesigning treasury policies; and integrating, automating and standardising of treasury systems and processes.
Highly commended:

* British American Tobacco (BAT) Project ASARA.
* IBM Global Treasury Transformation.

Cash Management Project of the Year

Winner: Caterpillar Inc Bank Account Reduction

Caterpillar’s chief financial officer (CFO) set an objective to deliver world-class processes to reduce risk, complexity and cost, increase effectiveness, and improve reporting flexibility and timeliness. One of the measures for accomplishing this objective was aligning the number of bank accounts with Caterpillar revenue. Caterpillar’s starting point was 978 accounts with a goal of 840. Overall, Caterpillar closed 304 accounts.
Highly commended:

* East African Tea Sales Electronic Billboard - Kenya Tea Development Agency.
* Roche - Genentech Cash Management Integration.

Supply Chain Finance Project of the Year

Winner: General Mills Supply Chain Finance

Since going live in April, General Mills has several vendors representing over US$100m annual spend using its supply chain finance solution. In addition, it has other vendors who have agreed to extended terms. To date, the project has generated over US$20m in improved cash flow, with a goal of many times that in the current fiscal year. While General Mills started its cash efficiency journey in direct materials, it is now rolling out to other large areas of spend in logistics, contract pack and marketing.
Highly commended:

* Casino Group Trade Portal.
* Volvo Supply Chain Finance Programme.

Corporate Treasurer of the Year - Readers’ Choice Award

Winner: Ricky Thirion, Senior Vice President - Corporate Treasury, Etihad Airways

Ricky Thirion formally created the Etihad Airways’ treasury in 2007 and has built up a unit that has supported the rapid growth of the airline, while implementing the entire corporate treasury infrastructure (people, policies, processes, systems and controls). It is now a fully-fledged corporate treasury function supported by a global base of banking partners.
Highly commended:

* Chris Berris, Group Treasurer, Hunting.
* Dennis Sweeney, Deputy Treasurer, GE.

Treasury Team of the Year

Winner: AkzoNobel Treasury Transformation

The AkzoNobel treasury team achieved a complete transformation of AkzoNobel's treasury function despite some of the most extreme circumstances imaginable. Its outstanding achievement has been the transformation of treasury in just two years from a reactive, transaction-oriented organisation to a highly dynamic cutting-edge function. While much of the transformation and delivery of multiple initiatives was achieved via parallel project execution, this was only feasible because of treasury teamwork.
Highly commended:

* Global Treasury Helps to Create SAP's Future.
* RTL Group Treasury Organisation Improvement Project.

Gold award

Winner: General Mills Supply Chain Finance

This award was given to the corporate treasury that received the highest marks across the other project categories. The judges said this about the General Mills Supply Chain Finance project:

* “I am really impressed. It appears that a clear objective was set by the CFO and a capable team set up to realise these objectives.”
* “The project was very well planned, including multiple disciplines with an understanding of the drivers for each.”
* “There were significant cash flow savings - as well as a purposeful path for moving forward.”

Carole Berndt, regional treasury executive for Europe the Middle East and Africa (EMEA) at Bank of America Merrill Lynch, said: “We would like to congratulate gtnews for hosting this event, which recognises excellence in treasury. In these difficult times, those that have embarked on transformation projects have shown much corporate courage. These awards pay tribute to treasuries that have created cash and operational efficiencies for their organisations.”

gtnews would like to thank its expert panel of judges, who worked through many detailed case studies in treasury success.

First published on www.gtnews.com 

Survey Reveals Increasing Uncertainty Around SEPA

13 Oct 10

A year after the transposition of the Payment Services Directive (PSD) and implementation of the single euro payments area (SEPA), European payments professionals are increasingly uncertain with regards to the progress in harmonising and regulating an integrated European payments market. Meanwhile, new competitors are registering rapidly as new payments institutions and are creating major challenges for traditional banks.

Although 85% say the PSD transposition process has been successful, 51% of bank respondents and 36% of non-banks believe that derogations actively hindered the transposition. Over two-thirds (68%) believe there will be a PSD Mark II to replace the deficiencies of the first. While on the other hand, over half (54%) of the respondents say that SEPA is not succeeding, compared to only 24% who think it is.

For the second year, the Financial Services Club ran a survey of payments professionals worldwide to see how successful the implementation of the PSD and SEPA have been since the PSD transposition in November 2009 and implementation of SEPA's programme of Credit Transfers (SCTs) and Direct Debits (SDDs) at that time.

This year's survey is sponsored by Dovetail, Earthport and Logica, and was completed by over 320 people covering all of the eurozone and more. Representatives of 42 nations took part during the summer of 2010.


The responses were supportive of the PSD process, with 85% of respondents saying that the process had been successful, with just a few issues related to the use of derogations in some countries.

For these reasons, many believe there will be a new PSD to replace the deficiencies of the first. However, they would rather have a continually adjusted directive rather than new directives drafted every few years.

Meanwhile, 66% of bank respondents had seen major change as a result of the PSD, compared to only 31% of the non-bank respondents. This is a reflection of the major change initiated by the PSD on banks internal systems and processes, and the launch of new competitors. For example, over 70 payments institutions (PIs) were cited by the survey's respondents as being created since the introduction of the PSD. These included regular suspects, such as PayPal and Western Union, and a few new entrants including Earthport and Voice Commerce.


Respondents are less confident about their knowledge of SEPA this year. Only 55% felt that they understood SEPA well, compared to 62% last year.

The problem relates to a lack of benefits (17%), bank (18%) and corporate (16%) resistance to SEPA, limitation by countries through the use of derogations (17%) and, most importantly, the lack of an end-date (24%) meaning that there is no motivation to implement SEPA instruments.

This is why the majority of this year's respondents think that the SEPA vision for "all eurozone payments transactions to be processed as though they were domestic" will be achieved between 2014 and 2017 (43% of the vote). This is less optimistic than a year earlier, when 49% of respondents thought it would be achieved before 2014. Interestingly, only 11% of respondents a year ago thought that SEPA's vision would be realised after 2017, compared to 34% this year.

Chris Skinner, chairman of the FS Club and leader of the research project, said: "Last year's survey identified major cynicism about the implementation of the PSD, with many saying that derogations and optional services would cause confusion and a lack of parity. Unfortunately this has proven to be the case, as borne out by this year's survey, but what concerns me more this year is that the cynicism has spread to SEPA. Banks and corporates just don't get where it's heading, and this lack of direction is caused by the absence of an end-date. Even with the SEPA Council and the European Commission's consultation on an end-date, we still don't have one and, until we do, this headless chicken will remain just that."

First published on www.gtnews.com 

gtnews Global Corporate Treasury Awards 2010 Shortlist

28 Sep 10

The gtnews Global Corporate Treasury Awards 2010, sponsored by Bank of America Merrill Lynch, pay tribute to treasury innovation that has contributed to the success of a corporate's business. The awards will be presented at a gala dinner at Sibos in Amsterdam on 26 October 2010.
Awards Shortlist
Treasury Technology Implementation Project of the Year

* AkzoNobel Treasury Transformation Project - IT stream
* British American Tobacco (BAT) Project ASARA
* IBM Global Treasury Transformation

Cash Management Project of the Year

* Caterpillar Inc Bank Account Reduction
* East African Tea Sales Electronic Billboard
* Roche - Genentech Cash Management Integration

Supply Chain Finance Project of the Year

* Casino Group Trade Portal
* General Mills Supply Chain Finance
* Volvo Supply Chain Finance Programme

Corporate Treasurer of the Year - Readers’ Choice Award

* Chris Berris, Group Treasurer, Hunting
* Dennis Sweeney, Deputy Treasurer, GE
* Ricky Thirion, Senior Vice President - Corporate Treasury, Etihad

Treasury Team of the Year

* AkzoNobel Treasury Transformation
* RTL Group Treasury Organisation Improvement Project
* Global Treasury Helps to Create SAP's Future

Treasury Technology Implementation Project of the Year

This category covers any aspect of treasury technology, whether that is choosing a new treasury management system (TMS) or enterprise resource planning (ERP) system, an automation project, straight-through processing (STP), eBAM, bank connectivity, SWIFT implementation, risk management system, or electronic trading platform, etc. The award will be given to the corporate treasury that developed and implemented an innovative IT project which solved a specific problem or established best practice within the organisation.
AkzoNobel Treasury Transformation Project - IT stream

In 2008, multinational manufacturing corporation AkzoNobel embarked on major treasury transformation projects following the acquisition of ICI, which included: optimisation of the global transaction banking infrastructure; redesigning treasury policies; and integrating, automating and standardising treasury systems and processes.

One judge commented: “Well planned and executed - best in class by starting with business case approval and alignment across multiple lines of business/requirements. AkzoNobel overcame project complexities including SAP nuances, implementation of new organisation, foreign exchange (FX) and other moving parts simultaneously.”
British American Tobacco (BAT) Project ASARA

With Project ASARA, BAT wanted to create: an optimal account structure to consolidate cash; a transactional banking structure to facilitate the centralised accounts payable (A/P) and accounts receivable (A/R) managed by British American Shared Services in Africa & the Middle East; a solution that covered Turkey, Egypt, Dubai, Bahrain, Lebanon, Jordan and Algeria; and a technical solution to facilitate a seamless interface to SAP using a non-bank proprietary interface, and highly automated and STP of all transactions.

“I am impressed by the results of a project covering such diverse countries and am convinced there are significant benefits for the BAT group which can serve as an example elsewhere,” said a judge.
IBM Global Treasury Transformation

"State-of-the-art results,” one judge said about this project. In April 2010, IBM successfully rolled out its most intricate and invasive treasury transformation projects to date. Starting in 2007, the project team first identified the requirements versus current system gaps, performed a buy versus build analysis, decided on a vendor, determined the necessary process changes, and implemented a best-of-breed treasury work station (TWS).
Cash Management Project of the Year

The winner of this award will be the treasury that was best able to improve its cash management processes, whether in A/P, A/R, cash forecasting, netting/pooling, etc.
Caterpillar Inc Bank Account Reduction

At the April 2007 Worldwide Finance Managers meeting, Caterpillar’s chief financial officer (CFO) set an objective to deliver world-class processes to reduce risk, complexity and cost, increase effectiveness, and improve reporting flexibility and timeliness. One of the measures for accomplishing this objective was reducing the number of bank accounts. Metrics were established to align multi-generational process plans to achieve world-class grade by 2015. Caterpillar’s starting point was 978 accounts with a goal of 840. Overall, the company closed 304 net accounts (excluding accounts for mergers and acquisitions).

As one judge commented: “This is a good, practical cash management project that everyone can follow. Nothing fancy - just getting down to basics: preferred banks, fewer accounts and centralised control.”
East African Tea Sales Electronic Billboard

The East African Tea Trade Association (EATTA) is a voluntary organisation that brings together tea producers, buyers (exporters), brokers, tea packers and warehouses. The electronic billboard project achieved:

* 15-minute turnaround time on reconciliation and payment notification.
* 100% transparency across the industry.
* 100% bank guarantee for collection account inflows.
* Secure web-based, real-time billboard available to all stakeholders.
* Mitigation of broker liquidity and settlement risk.
* Separation of tea release and payment confirmation.

One judge observed that results were achieved with significant business impact on all parties involved: “Culture, common practices and technology were all potential obstacles very well resolved.”
Roche - Genentech Cash Management Integration

In March 2009, Roche completed the US$46.8bn acquisition of US firm Genentech. Roche wanted to integrate Genentech’s cash management business in the US and Singapore into Roche’s in-house bank and payment factory. The project covered 14 US accounts zero balancing into Roche’s overall US dollar liquidity structure with Citi. Intercompany and non-US dollar-payments, as well as FX-exposure hedging, became absorbed by Roche’s in-house bank and payment factory.

This project, according to one judge, showed “strong collaboration with internal and external teams - with treasury as leader”.
Supply Chain Finance Project of the Year

This award will be given to the corporate treasury that has overcome the challenges of developing a supply chain finance (SCF) programme and can exhibit best practice in rolling out the solution to its suppliers.
Casino Group Trade Portal

Casino Group, a leading food retailer, wanted to offer its suppliers tailor-made financial supply chain (FSC) services, such as early payment services. Using Misys Trade Portal, Crédit Agricole has provided Casino Group with an online portal through which it can develop strategic relationships with its suppliers. The solution put Casino in the driving seat - giving it visibility and control over their trade finance transactions and supplier relationships. It also allows Casino to give its suppliers financing quicker and more transparently than before.

“This project was clearly well construed and implemented. The benefits are evident and I also like the good collaboration between all partners,” commented a judge.
General Mills Supply Chain Finance

Each year, General Mills, Inc (GMI) benchmarks working capital metrics against its competitors. Recent analysis revealed that it had first or second quartile performance in days sales outstanding (DSO) and days of inventory metrics, but was in the fourth quartile in days payables outstanding (DPO). A large working group of key individuals from sourcing, finance, A/P, financial reporting, legal and IT began to implement the SCF solution, which included IT milestones, development of a sourcing vendor roll-out strategy, working with Orbian on securing bank financing and many internal stakeholder approvals from legal to A/P to accounting.

One judge commented: “Good planning and execution. Especially valuable was the inclusion in the project team of various corporate functions. I believe that the fact they were able to improve the efficiency of the A/P issue resolution process efficient additional value.”
Volvo Supply Chain Finance Programme

The Volvo Group launched a SCF programme in order to offer its suppliers a solution enabling them to get paid earlier at better rates of financing based on Volvo's strong credit rating. The programme alleviates the burden of long payment terms traditionally required by the automotive industry’s long production cycle and strengthens the financial viability of suppliers. Volvo selected the PrimeRevenue SCF Platform that offers suppliers the ability to sell their Volvo receivables any time they choose, as quickly as a few days after invoice receipt, and for any payments they choose.

“[The project exhibited] cost savings and cash flow stability along the supply chain. This really looks as if all objectives were met, even surpassed,” said a judge.
Corporate Treasurer of the Year - Readers’ Choice Award

The winner of this award will be recognised by their peers as an industry spokesperson and leader - a treasurer who has overcome the challenges posed by the financial crisis and made an outstanding contribution in treasury.
Chris Berris, Group Treasurer, Hunting

Chris Berris was promoted to the position of group treasurer at Hunting, an international energy services company, earlier this year. Since his appointment Chris has taken on and excelled at a number of challenges, including a major project that managing the successful introduction of SMA Financial’s SWIFT service bureau. His organisational skills, attention to detail and treasury knowledge has been evident throughout the project. It has had a measurable impact on Hunting’s ability to manage cash and liquidity, while gaining greater visibility and control over group-wide treasury activity.
Dennis Sweeney, Deputy Treasurer, General Electric

Dennis Sweeney is currently responsible for global cash management at GE Treasury. He and his team operate from their base in Connecticut and through regional treasury centres in Dublin, Delhi, Shanghai, Tokyo and Sao Paolo. Dennis is a highly regarded innovator in the field of treasury services. He has been a leading proponent of using improved communications between corporations and their banks to drive productivity and reduce costs. Earlier this decade, GE and its software vendor co-developed the first web-enabled treasury workstation.
Ricky Thirion, Senior Vice President - Corporate Treasury, Etihad Airways

Ricky Thirion created Etihad Airways’ corporate treasury in 2007 and has supported the rapid growth of the airline while implementing the entire infrastructure. It is now a fully-fledged function with achievements including: leading role in the negotiation and execution of the largest-ever commercial aircraft order (totalling US$50bn at list prices); established a global cash management system covering 63 locations; and raised over US$1.5bn during the financial crisis to fund the expanding fleet and other assets of the airline.
Treasury Team of the Year

This award is for the corporate treasury team that can best demonstrate vision and innovation in terms of transforming their treasury department to meet future challenges. The winner will show excellence and resourcefulness across all treasury disciplines - working capital management, corporate finance and funding, liquidity and risk management, etc.
AkzoNobel Treasury Transformation

The AkzoNobel treasury team achieved a complete transformation of its treasury function despite some of the most extreme circumstances imaginable, including: £8bn acquisition of ICI just after the treasury transformation project began, necessitating the redesign of infrastructure and treasury processes; the need to refinance 60% (€2bn+) of the company's external debt and restructure internal capital allocation to unlock cash during the peak months of the 2008/9 financial crisis; and the need to radically cut costs (achieved -39% in two years), while simultaneously rebuilding a fragmented and marginalised treasury with limited grasp of contemporary treasury processes, resulting in a 31% reduction and 70% churn of staff.

“Dealing with both the expected and the unexpected in very difficult times has been challenging for all treasuries. AkzoNobel seems to thrive in such situations,” said one judge.
RTL Group Treasury Organisation Improvement Project

Three year ago, RTL Group’s treasury (GT) and Corporate Finance & ERM department (T&CF) launched a new treasury road map culminating in 2010 with an IT ‘big bang’: new FX platform, new information feeding tool, new treasury management system, payment factory via SWIFTNET and reorganisation of all banks, including connectivity.

This ambitious programme was a vast and comprehensive revamping of the whole treasury department. The aim was to create value while significantly reducing costs and improving quality of disclosures, reporting and services to subsidiaries. One judge commented: “The three year roadmap starting in 2007 - RTL treasury stayed on target with objectives while responding to the financial crisis.”
Global Treasury Helps to Create SAP's Future

Today, customers in more than 120 countries run SAP software. SAP’s global treasury department is a 17-person organisation with global responsibility. The team acts as trusted advisor to the executive board and ensures efficient financial risk and asset management. The organisation is divided into the traditional front-, middle- and back-office structure to assure a proper segregation of duty. The treasury team showed excellence and resourcefulness across all treasury disciplines - cash management, FX trading, risk management, corporate finance and funding.

“An expansive array of objectives were addressed and accomplished, with in-depth and comprehensive planning across several initiatives, as well as large successes in multiple components of the treasury role within the enterprise,” commented one judge.
Gold Award (Overall Winner)

This award recognises excellence in treasury management and honours the corporate treasury operating as a strategic partner to the business. The Gold Award winner will show a standard of best practices throughout a company’s treasury or on the groundbreaking nature of a particular project. It will be given to the corporate treasury with the overall highest score.

Convergence 2010: What Does Real Time Mean in Transaction Banking?

21 Sep 10

Over 50 transaction banking and payments experts gathered in London at Polaris' Convergence 2010 event, co-hosted by the Financial Services Club, to discuss the meaning of real time in transaction banking. Operating under Chatham House Rules, the participants openly debated the relevance of real time payments for corporates.

The first panel, which focussed on the operational aspects of real-time payments and how the game has changed, said that for most corporates it wasn't so much the movement of cash but the movement of useful and useable information that was of greater importance.

However, a payments expert in the audience argued that "everyone" wants faster payments. "Corporates want faster payments to reduce the effect of foreign exchange fluctuations, for example, and enable them to use their cash better - I think that we in the industry underestimate the desire," he said.

Most agreed that the Faster Payments Scheme (FPS) in the UK has been a game changing initiative - particularly since the Faster Payments Direct Corporate Access (DCA) transaction value limit increased from £10,000 to £100,000 per transaction at the beginning of September, which makes FPS much more attractive to the corporate world. The bankers on the platform highlighted the operational challenges they were facing to process domestic and global payments intraday - or as one termed them 'martini payments': anytime, anywhere.

The second panel looked at the fraud and risk issues and opportunities of real-time transactions. A senior payments expert said that the prevalent perception that the more digital things are, the more fraud is committed is not true. But he believes that banks have been poor at resolving the issue mainly because there is no standardised approach to fraud protocols.

At the event, Polaris launched Intellect Global Universal Banking (GUB) M180, which is comprised of 95 modules that fit together in a service-oriented architecture (SOA) model to allow financial institutions to modernise at a low total cost of ownership (TCO). Arun Jain, chairman and chief executive officer (CEO) of Polaris, explained the concept where every module had a guaranteed design lifespan of 15 years - hence 180 months (M180).

E-payments Gather Pace as Cheque Usage Plummets, Finds Payments Council

10 Sep 10

The total value of payments in the UK economy fell 0.6% in the second quarter of 2010, according to the latest data from the Payments Council. Cheque usage dropped by £21.5bn, down 10% compared to the same period in 2009 as businesses and consumers switched to faster and more convenient electronic payments and cards. Every day of the quarter, on average 290,000 fewer cheques were written than the year before - over three fewer per second.

The use of debit cards (paying for goods and services) and Faster Payments (for transferring money between accounts) took up all the slack left by cheques. Debit card usage rose £7.9bn year over year, up 12.4%, while Faster Payments increased £16.9bn, a dramatic 67% rise as more banks made the service available to their customers, and consumers, and increasingly businesses, took advantage of being able to make instant transfers of their money.

Debit card usage also ate into cash payments. The amount of cash withdrawn from cash machines (a proxy for the amount of cash used for transactions) was £1.6bn lower than in the second quarter of 2009, a decline of 3.2%.

Credit card spending was also weak, rising just 3.9%, barely ahead of inflation. This reflects credit constraints and a continued migration to debit cards. Over the period, the amount spent on credit cards was matched by the amount paid off as consumers shied away from loading up on additional borrowing. Credit card repayments rose by over 7% when compared to 2Q09, averaging over 99% in terms of the amount of debt repaid.

The number of CHAPS payments, which are commonly used for large banking and commercial transactions including house purchases, is slowly increasing. The fall in values, now at an annual rate of 12%, is due to a partial return to normality for the financial markets after the banking crises of 2007-8, which caused a surge in value. A £70bn increase in Bacs, plus the growth in Faster Payments, can be seen to reflect a recovering economy.

Sandra Quinn, director of communications, Payments Council, said: "The payments revolution continues apace in the UK. Cheque usage is shrinking dramatically, while credit cards hold less appeal for consumers and businesses. We use cash less where there is an easy alternative, but we're years away from cash falling out of fashion. Debit cards are taking over our daily purchases, while Faster Payments are fast becoming how we transfer our money electronically."

In other news, the Faster Payments Direct Corporate Access (DCA) transaction value limit increased from £10,000 to £100,000 per transaction as of 6 September.

The limit increase could have significant benefits for corporates that are looking to improve their payments efficiency, according to Norman Taylor, product manager at Experian Payments.

"For instance, businesses providing loan facilities will now be able to use DCA for Faster Payments for funding borrowers' accounts with amounts of up to £100,000. In addition, Faster Payments is particularly attractive for corporates from a customer service point-of-view as it enables an almost real-time transfer of money into a customer's or supplier's account and can also be accompanied by an automated message, via SMS or email, for example, advising the beneficiary that the payment has been made," he said.

"However, simply increasing the value limit is unlikely to persuade corporates to flock to the channel," he added. "While there is still work to be done to educate businesses and banks around the benefits of using Faster Payments, businesses also still need more clarity before they make a payment on whether it is handled as a Faster Payment and when it will arrive in order to effectively manage their finances."

First published on www.gtnews.com 

Financial Professionals Lack Confidence in Risk and Performance Metrics

06 Aug 10

A recent survey found that the vast majority (85%) of financial services and IT professionals do not have performance management systems completely integrated with risk analysis systems, according to Oracle's 'European Confidence Report'. In addition, 41% of those that do not currently assess risk and performance together are not seeking to actively incorporate risk into decision-making. This means that decision-makers will continue to make critical business choices without accounting for the all challenges that their business face.

In an interview with gtnews, Nazif Mohammed, vice president Europe, Middle East and Africa (EMEA), finances services, Oracle said: "We are living through incredible times - [the crisis] is probably the most expensive training exercise in bank performance measurement. Even the layperson on the street is now aware of stress testing. The aim of the survey was to understand the 'new normal' and see if the banks are actively incorporating risk into their day-to-day decision-making."

The research, conducted by Vanson Bourne, surveyed 228 financial services professionals and 222 IT professionals in financial institutions across Europe, including the UK and Ireland, France, Germany, Italy, Belgium, the Netherlands, Luxembourg and Switzerland.

The survey's key findings include:

* Almost half of all participating banks were not confident of the accuracy of their risk and counterparty related data. Alarmingly, more than one in seven (14%) admitted they are unable to monitor and respond to changing risk scenarios.
* Financial institutions are not leveraging integrated risk information in decision-making: 41% of financial institutions surveyed do not currently assess risk and performance together, and only 18% of respondents reported an ability to deliver performance and risk information to the business in real-time.
* Existing IT systems are unable to deliver what the business needs to react immediately to external events: only 26% of respondents are confident that their existing IT system is capable of using stored data to provide a full risk analysis across all business units.
* Almost two-thirds (64%) do not have confidence that IT is able to provide a 360-degree view of the entire business. For example, only 32% of the participating banks claimed they had access to vital data like counterparty information and 25% of the participating UK banks couldn't even produce this information.

Mohammed said: "Financial institutions understand how important it is to assess risk and performance management together, but have great difficulty in doing so for various reasons, such as data silos or legacy banking systems. The problem is also in the way businesses are structured, with a finance team that looks at profitability and a risk management team that solely looks at risk, and those shall not come together. Many times at our customer meetings these professionals exchange cards because they are meeting for the first time."

Across EMEA, only 24% see risk assessment and performance management as being tightly dependent, where both aspects are continuously assessed and reported on. Despite this, almost a third (29%) of respondents have an element of their remuneration package based on the accuracy of their information and in next three to five years, 58% will see risk actively be built into the process of pricing products. With these considerations it is surprising that more banks are not actively incorporating risk into business performance already.

Meeting the Compliance Challenge

The current business climate also means that financial institutions will continue to be subject to more regulations, making the need for integrated systems even more critical. Eighty six percent expect to see some or high levels of changes in the regulatory load on their organisation or in the financial services market. Compounding this problem is the fact that 40% believe that increasing compliance coupled with tougher deadlines will continue to hinder data accuracy.

"Financial institutions take regulatory pressures very seriously, but the challenge is in the approach," said Mohammed. "Do they add yet another system and continue trying to patch the holes to meet the requirements? This is a common approach - put a reporting system in place for liquidity management, another for pulling data for stress testing, etc. But this is done with very little co-ordination across the group. Financial institutions need to take a different approach where these systems are seen are part of an overall architecture of addressing the data, the transaction and the reporting capabilities."

First published on www.gtnews.com 

EU Bank Stress Tests Receive Mixed Response from Industry

27 July 2010

The Committee of European Banking Supervisors (CEBS) released its summary report on the results of the EU-wide stress test exercise, which revealed that just seven out 91 European banks would have insufficient reserves to maintain a Tier 1 capital ratio of at least 6% in the event of a 'worse case' scenario, such as a recession and a sovereign debt crisis. Many critics are arguing that the evaluations were too easy.

The CEBS was mandated by the ECOFIN to conduct, in co-operation with the European Central Bank (ECB), the European Commission (EC) and the EU national supervisory authorities, a second EU-wide stress testing exercise. Germany's Hypo Real Estate Holding, the Agricultural Bank of Greece and five Spanish savings banks have failed the resiliency test. These banks will have to raise €3.5bn in total to boost their capital buffers.

The 91 banks represent 65% of the European market in terms of total assets. The threshold of 6% was used as a benchmark for the purpose of this stress test exercise only. This threshold is not a regulatory minimum - all banks that are supervised in the EU need to have at least a regulatory minimum of 4% Tier 1 capital.

Unsurprisingly, the banking industry welcomed the results of the stress tests as attestation that the majority of banks adequately meet the legal and market requirements in terms of solvency. The British Bankers' Association (BBA) released a statement which said: "UK banks have already put in the work to rebuild their businesses and put more money aside against future financial problems. It is no surprise to find they have exceeded the standards set out by CEBS to ensure banks across Europe are well placed to weather any future financial problems."

Yet, many in the industry believe that the stress tests were too easy. Christophe Nijdam, bank analyst at independent equity research firm AlphaValue, said: "The market wanted blood on the wall but it got Spanish ketchup on the carpet instead. Seven institutions pinned down out of 91 European banks resulting in a failure rate of less than 8%. The American tests had a 53% failure rate with 10 out of 19 US banks at the time."

Gerard Fitzpatrick, global fixed income portfolio manager at Russell Investments, was also critical. "The EU has missed an excellent opportunity to materially boost confidence to the liquidity and capital providers for EU banks by limiting these tests to only 'worse case' stress tests, rather than a perceivable 'worst case' stress test, where ultimate concerns of bank failure risk would have been addressed," he said.

"The more rigorous a test is, the more reliable its pass mark is. In the wake of the global financial crisis, capital providers to EU banking want to be assured that all EU banks would be adequately capitalised against a perceivable 'worst case' test. Such a test would have considered a severe economic shock akin to the crisis and to also consider a sovereign default," he added, urging the EU and CEBS to engage with the market to address questions emanating from these tests and to enhance the stress test already done to capture a 'worst case' scenario.

However, Leigh Bates, head of financial services practice, SAS, believes that the long-term purpose of stress testing has been overlooked. "While the tests will enable regulators to determine necessary capital ratios, the longer term aim is surely to help 'future-proof' the industry. Ultimately, banks need to see for themselves what changes are required in terms of risk management procedure so that they can be confident in their own ability to deal with whatever events the future may hold. All the talk about inconsistency in the assessment at a European level is arguably overlooking the internal issues banks must address individually and which will dictate whether or not a bank will fail," Bates said.

First published on www.gtnews.com 

Impending Regulatory Changes Dominate BBA Conference

20 July 2010

On the eve of the US Senate passing "the most comprehensive financial regulation reforms we have seen since the 1930s", in the words of US Ambassador and ex-banker Louis Susman, and the European Council's meeting to update its progress on a reform package for the supervision of the European financial system, it is no wonder that the British Bankers' Association (BBA) International Conference on 13 July 2010 in London focused mainly on impending regulatory changes.

The predominant discussions were around remuneration, bank taxes and levies, Basel III and Capital Requirements Directive (CRD) III and IV, and, of course, the 'too big to fail' debate resurfaced again this year.

The title of the conference was the question: evolution or revolution? Angela Knight, chief executive officer (CEO) of the BBA, was quite clear in her opening speech that evolution was the way forward for the industry. "Many changes have already been made. What happens next, though, will affect many parts - our functions, our operating costs, and the supply and price of credit to the economy," she said. "We therefore need a sensible, well thought-out evolutionary process from where we are to where we need to be, undertaken in co-ordination with our policy makers."

On all issues, the big push from the banking industry is for a co-ordinated global-level response that would tie all countries into a relatively uniform roll out of financial reforms in order to protect competition. But that is looking less and less likely.

As Knight said: "The G20 began well in pulling these initiatives together. But what looked coherent some 18 months ago looks much less so today. It is one of the tasks of the BBA to engage not just with the UK reform agenda but the EU agenda and those of the international standard setters."

Stephen Green, group chairman, HSBC, also weighed into this debate, highlighting the possibility of an arbitrage effect if regulations are implemented unevenly across the globe. "The European Parliament's proposal on remuneration is a very clear example that raises questions about international co-ordination. It is a broadly sensible proposal, although aspects of it are still unclear. But if very different regulations prevail in the US, Switzerland and Asia, for example, then it risks providing real incentives for a mobile population to arbitrage the rules to London's - and therefore the UK's - disadvantage.

"Then there is the question of taxes and levies. The current array of proposals is striking in its lack of consistency in terms of amounts, duration, basis of calculation and ostensible purposes. In the absence of global co-ordination, banks face distortions and could end up facing overlapping national and regional requirements that could result in double taxation," he added.

President and chief executive officer (CEO) of Royal Bank of Canada, Gordon Nixon, opened his speech by describing why Canadian banks have proven to be more resilient during the financial crisis, while attempting to dispel the myth that it was the conservative, boring nature of Canada's banks.

He argued that proper risk capital allocation against trading businesses would automatically restrict higher risk activities and at same time allow banks to make their own decisions around business strategy and capital allocation - but that Basel III is not the way forward.

"Basel III's proposed rules are supposed to be a starting point for discussion. Ironically, these proposed rules, for all their good intentions, will negatively impact even the healthiest bank's balance sheets in terms of capital, leverage ratios and liquidity and compromise economic growth. The proposals are so complex and onerous that we run the risk of an agreement that lacks transparency and integrity, or one that results in non-uniform implementation," said Nixon. "Canadian banks, as an example, would be lifted from their position as well-capitalised, liquid financial institutions and recast as undercapitalised. Banks that passed the 'real life' stress test may fail the theoretical one - a pretty good indication of flawed methodology."

The 'too big to fail' debate was tackled by Andrew Bailey, executive director for banking services and chief cashier at the Bank of England (BoE). "As the recent record shows, large banks currently cannot safely be put into insolvency and so public money has had to be used ahead of losses being absorbed by so-called capital instruments. That is wrong," he said. "This brings us to the issue of whether banks should be restructured to facilitate the end of the too big/important to fail issue."

He argued for a significantly different method to resolve the issue, one based on the London Approach where a debt restructuring is undertaken for a non-bank company. Typically, creditors agree to restructure the debt of the company on the basis that it offers better value than an insolvency, but this can take weeks or months and much haggling. "The reason I mention the elapsed time is that with a non-bank that is possible - the creditors usually cannot run. But, of course, with a bank this is not possible. A loss of confidence in the bank causes the creditors to run very quickly. So with banks everything has to happen very quickly, over no more than a weekend. I call it speed M&A - and it is not good for the nerves," he said.

The non-bank solution has the advantage of being a market solution, according to Bailey. The idea for bailing in banks, or creditor re-capitalisation, seeks to achieve bank recapitalisation using speeded up non-bank tools. "We need something to give us a credible chance of covering the losses and most likely recapitalising a big bank. Such an event should avoid the use of public money. The idea is that the whole of the capital structure could be written down if necessary, and beyond that it would be possible either to haircut a portion of unsecured creditors, or carry out a partial debt equity swap. It sounds radical, but it isn't in the non-bank world," he said.

First published on www.gtnews.com