For anyone working in corporate treasury, the past 20 years have been something of a rollercoaster ride. From the introduction of the euro and the financial crisis of 2007/8, to the implications of Brexit and the ongoing tensions between the US and China, treasurers have continually had to adapt, learn and grow. They have also had to utilise skills today that they never thought they’d need 20 years ago.
From euro boom…
The creation of a true single internal market for goods, services, labour and capital was at the heart of the European Union (EU) project moving into the 21st century. The most high-profile result was the introduction of the euro between 1999 and 2002. Before the euro’s introduction, making and receiving domestic payments was the preserve of local clearing systems, regulated by national and central banks and the governments in each member state.
The European Commission (EC) was keen to make payments across the single currency zone cost as cheap and easy as domestic payments, so the concept of a single euro payments area (SEPA) was born. However, in order to realise its dream, the EC first needed a pan-European automated clearing house.
Step forward STEP2. At the turn of the century, approximately 40 different payment systems were used within the Eurozone, only a few of which were capable of processing cross-border payments. The development of STEP2 in 2004 by the Euro Banking Association was seen as the first truly pan-European payment system for mass payments and an important first step in realising SEPA.
Other milestones in the establishment of SEPA included:
- The launch of the SEPA Credit Transfer Scheme in January 2008.
- The introduction of SEPA Direct Debit Schemes in November 2009.
Today, according to figures from the European Central Bank (ECB), the number of credit transfers within the euro area increased by 4.7% in 2018 to 21 billion.
…to global bust
Yet while SEPA was being developed, dark clouds were starting to roll in.
In 2007, a crisis in the sub-prime mortgage market in the US meant these clouds quickly escalated into a thunderstorm. The problems in the US rapidly developed into an international banking crisis, starting with the collapse of the investment bank Lehman Brothers on 15th September 2008. Major bail-outs were called for across the world, and the global economy plummeted. The crisis also triggered numerous regulatory changes that have affected treasurers both directly and indirectly, including Basel III and money market fund reform in the US and Europe.
Prior to the financial crisis, the idea that banks should be seen as a source of counterparty risk was almost unthinkable – or at least a much lesser concern than supplier risk. Post-crisis however, treasurers learnt that counterparties could fail with very little warning. As a result, the focus on counterparty risk within corporate treasury departments increased substantially.
The crisis also had implications for credit ratings. In the early 2000s, most corporate treasurers considered credit ratings alone to be adequate for the purpose of measuring the level of their counterparty exposures. But this changed irrevocably with the collapse of Lehman Brothers, which at the time had a rating that placed it safely within the accepted ‘investment grade’ band.
“Lehman’s was still rated ‘A’ when it collapsed, which gave treasurers an opportunity to reassess their reliance on rating agencies,” says David Blair, Managing Director at Acarate Consulting.
Yet while most treasurers today still view credit ratings as an important measure of counterparty risk, they are using a wider range of sources to monitor the major forms of counterparty exposure. These include, but are not limited to:
- Information platforms such as Bloomberg and Reuters.
- Private/public financial data.
- Industry and peer insights.
Although the high focus on credit and counterparty risk has subsided somewhat since 2007/8, it still remains one of the most important concerns for corporate treasurers. Back then, a significant deterioration of credit happened worldwide. As a result, government support assumptions for large banks have been scaled back significantly in most developed countries. Yet despite this, banks have continued to grow even larger, more complex and more interconnected.
Visibility over counterparty risk is essential when it comes to managing and mitigating that risk effectively. This includes not only managing the risk on bank deposits and cash balances, but also understanding how market events may affect outstanding derivatives.
From technology solutions…
Despite the inherent risks in today’s treasury landscape, at the turn of the century the technology many corporate treasuries used simply wasn’t up to scratch. It was often neglected, with IT departments frequently controlling the technology budget and choices – rather than treasury having its say. For many companies, the only treasury technology used was the humble spreadsheet.
Yet soon after the financial crisis shook the world, senior management started to demand timelier and more accurate financial information – meaning treasury started to have a louder voice than ever before when it came to the technology agenda.
“Although Excel spreadsheets still underpin most corporate functions today, we have seen evolving technologies shift the focus away from spreadsheets and into more robust data warehouses,” says Ken Bugayong, Treasury Manager at Expedia Group. Information – and the activities it supports, such as improved cash visibility, accurate forecasting and effective risk assessment – is now even more crucial in an age when the pressure to deliver is greater than ever.
Michael Juen, Chief Customer Officer of treasury management software provider Bellin, believes that treasurers of today are key stakeholders and strategists with greater clout and influence. “With a modern, integrated, one-platform TMS, gone are the days of redundant data entry,” he says. “Instead of a lack of transparency – which didn’t just lead to an incomplete picture on which to base your decision-making, but also represented a huge security risk – treasurers are now much more in control.”
…to a relationship evolution
Whether you see them as valuable commercial partners, or as a necessary evil, banks are a major part of just about every enterprise. Given the role they play in the life of a corporate treasury operation, the relationship between banker and treasurer should almost certainly be more than just one of convenience.
Back in the early 2000s, treasurers often saw themselves as driving the relationship with their banking partners, organising formal review meetings and having regular informal conversations, for example. This all changed after the financial crisis, with treasurers placing a greater emphasis on seeking guidance from their banks.
“Treasury teams (of today) are looking to understand best practice and whether the approach they are taking to managing their investments reflects the ‘best in class’ ideas,” says Jim Fuell, Managing Director, Head of Global Liquidity Sales International at J.P. Morgan Asset Management. “Treasury teams continue to seek our guidance when it comes to the most appropriate levers, be it liquidity, credit, or duration for generating incremental return.”
Jonathan Pryor, Head of FX Sales at Investec, agrees that the depth of service has moved on. “Twenty years ago, you’d be happy just to be able to speak to someone,” he says. “Today treasurers do expect a personal service, tailored research and proactivity. Every bank should understand the companies they’re doing business with.”
There have certainly been some big changes over the past two decades. The breadth of products available has increased significantly, with more hedging products, more market counterparts and more choice on where to do business.
As Fuell observes, “Product pushers are a dying breed, so treasury teams will continue to look for partners who understand global short-term markets and who can bring their knowledge, global reach and expertise to bear in managing their investments.”
Emerging promise
The choice of where to do business has also grown considerably in the last two decades.
Back in the early 2000s, the BRIC economies (Brazil, Russia, India and China) were the talk of the town. Heralded as hot investment opportunities, they were seen as the future of globalisation, designed to challenge the status quo.
The meteoric rise of China has been particularly noticeable over the past two decades. Some 40 years ago, China’s economy was roughly the same size as that of the Netherlands – now it is the second-largest economy on the planet, behind the US. Economically and politically, China enmeshed itself in the global community it had once eschewed by joining the World Trade Organisation (WTO) in 2001 and relaxing the renminbi’s strict peg to the dollar four years later.
When the financial crisis struck and commodity prices collapsed, it hit Brazil and Russia hard. China and India, however, immersed in countless global supply chains, proved to be much more resilient. Following the crisis, China unveiled a huge stimulus package that kept its economy afloat. China’s currency is now an integral part of the basket of currencies that make up the IMF’s special drawing rights (SDRs). Nevertheless, growth in both China and India has slowed in recent years: China, for example, has seen GDP growth slow from 9.5% in 2011 to 6.6% in 2018.
While the focus on BRIC economies has died down somewhat, emerging markets remain a force to be reckoned with. Moving forward, economists point to Indonesia, Thailand, the Philippines and Vietnam as countries with the most exciting futures – simply because they are growing rapidly, are open to trade and dependent on exports.
Trade with the Far East will certainly continue to be a theme moving forwards, as the ongoing trade war between China and the US sees no sign of abating. With a presidential election around the corner, treasurers will be looking both east and west for some time to come.
Business as usual?
It’s clear that two decades of economic uncertainty has made the role of today’s treasurer a much more challenging and complex one – and this won’t change anytime soon. Navigating the investment landscape is one area that has brought new challenges following the arrival of low interest rates in the wake of the financial crisis.
“Today’s low yield environment has forced many asset managers into more illiquid or higher risk securities in order to provide expected returns to clients; something that the regulators are becoming increasingly concerned about,” comments Neil Hutchison, Executive Director, Lead Portfolio Manager for Managed Reserves Portfolios in Europe at J.P. Morgan Asset Management.
“This year we have had a number of negative headlines, including the gating of a high-profile equity fund and questions raised around other fixed income structures,” he adds. “In this environment, cash solutions that maintain enhanced market liquidity definitely are of increasing importance, not just for corporate treasurers but also longer-term investors.”
The road to 2040
While it’s difficult to predict how interest rates will evolve in the coming years, today’s savvy treasurers know that their role will continue to change on many different levels. After all, there is no escaping the fact that 20 years from now, the world will be a much more digital one. Banks and fintechs will have to be much more proactive in raising awareness and meeting the issues faced by their clients, partly by offering solutions and alternatives. Treasurers will have to adapt their operations as a result.
So what will treasury look like in 2040?
For some, the idea that artificial intelligence (AI) and machine learning will take over the treasury function is far-fetched. Proponents of this view believe the clue is in the name – ‘artificial’ intelligence, rather than real intelligence based on real knowledge, real experience and real judgements made in real time.
