With a little help from your banks

October 2013

With a swathe of new regulations coming down the pipeline, how can corporates cope? A panel during the Corporate Forum at Sibos in Dubai argued that the answer lies in a strengthening of the relationship between corporates and their banking partners.

Most corporate treasurers tend to be more reactive than proactive when it comes to new regulations, according to François Masquelier, Treasurer, RTL Group and Honorary Chairman and Founder of Euro Associations of Corporate Treasurers (EACT). Speaking at a Corporate Forum panel entitled ‘How treasurers are coping with regulations’ at Sibos in Dubai last month, Masquelier explained: “Apart from a few exceptions, most treasurers do not actively anticipate a new regulation and its impact – they always come late or even after the event.”

Masquelier believes that this is where treasurers’ associations, such as the EACT, can step in to be “proactive and anticipate the treasury community’s needs ahead of the game”. He used the example of discussion with the European Payments Council (EPC) regarding the Single Euro Payments Area (SEPA). The need to federate the national associations in order to be stronger and listened to by the EU body in Brussels became crystal clear. “SEPA was a great opportunity for us and it profiled the EACT. We decided to be part of the game and not let the banks and software vendors define the payment schemes and formats alone,” he said. “But this was brand new for us because we were accustomed to acting in nation silos.”

Attempting to influence the evolutionary process of emerging regulations is one area that collective action can bring results, but fundamentally dealing with the impact of regulations transposed into national terrains is very much an individual company response. John Christensen, Assistant Treasurer, New Ventures and Products, PayPal, said that as a consequence of the changes going on in the regulatory environment, PayPal’s treasury reviews its bank counterparties and constantly looks at its allocation, not only in terms of credit but also risk. “Treasurers now need to have real-time data of ratings, spreads, balances, etc. They need to be having a conversation with their banking partners about what to do, which is not just about products and services but how comfortable they are with the risk involved. That is a different type of dialogue – it’s not just about agreeing prices.”

Christensen is tasked with the objective of keeping PayPal’s treasurer abreast of Dodd-Frank and Basel III. “The impact that will have on us is directly related to what the banks will be required to hold as capital buffers,” he explains. “Some of those costs will be passed on to us via processing or underwriting fees for debt, or the capacity of that bank to re-enter into our revolver. We have to think about all these things in advance because it will affect which bank will want to continue doing business with us, and we need to ensure that we have a clear line of sight over what we are offering those banks.”

Coming out of the financial crisis, ‘counterparty’ is a loaded term. According to Tom Schickler, Global Head of Liquidity, Payments and Cash Management, HSBC, most treasurers have credit default swap (CDS) spreads on their desks and are looking at them on a real-time basis. “That is the reality today. So what are we doing about it? I believe that the answer is about enriching and elevating the dialogue, so that we are less transactional and more strategic. How can we partner together to deal with the challenges we face?

“Although regulations are painful and can be viewed as a problem, the main motivating force for regulators is greater transparency. Basel III, which is a set of guidelines that are meant to be interpreted globally and enacted into law, presents such an opportunity because through transparency we can simplify, streamline and globalise approaches, and that takes risk out of the equation. This is true not just for banks but for corporates as well, so we can focus our effort and capital on the things that add value from a corporate perspective,” he said.

Both corporate treasurers on the panel described how they were working towards deepen the relationship between themselves and their banks, which is necessary for navigating the uncharted waters of the oncoming regulations. Masquelier said that after the crisis, his company reinforced its bank relationship policy with its core banks in order to “protect our company”, effectively cutting its ties to Tier 2 and 3 banks. “One of the positive aspects of these regulations is that it gives you an opportunity to concentrate and reduce the number of counterparties. Unless they have credit needs that can’t be solved by the market, most corporates are trying to reduce the number of banking relationships.”

Masquelier added that it is important to make sure the counterparties are satisfied with the relationship. “It has to be a win-win or at some point they may change their strategy. If you are not a profitable customer, they could decide to cut the relationship.”

Christensen acknowledged that PayPal uses more banks globally than it has in its credit facility and views that as a problem. “Bringing the number down is very important to us because changes in regulations raises the question as to whether the banks going to participate in the revolver going forward. So we have to be razor sharp as to what business we are taking to which banking partners.”
This deepening relationship has paid off. Christensen reports banks being remarkably open about their business. “When we had questions about our counterparties’ balance sheets and other concerns, our banks have been very forthcoming. They have immediately offered a call with their CFO. The two or three banks that we have called have been very open – they know that other treasurers will also have the same questions as word gets out pretty fast.”

Arwa Hamdieh, Co-Founder, Financial Services Association (UAE), said that in the Middle East corporates are now using the strong relationships with the banks to communicate beyond the issues that they are looking to resolve immediately. “Corporates in this region are using their banks as means to communicate to regulators, which is an indicator that the relationship is stronger. We are focused on developing the dialogue and explaining the importance of working collectively,” she said.