Companies seek liquidity solutions as loans dry up

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As banks continue to cut back on lending to comply with regulatory capital requirements, companies are being forced to optimize and manage their cash and liquidity with ever-greater precision.

This can be beneficial for companies and their banks, because banks can help offset declining revenue from lending with fee income and service revenues from providing liquidity management solutions, according to Fundtech, a bank technology provider.

For companies, and especially since the 2008 crisis, liquidity management is now a critical component of their cash management strategy, enabling them to better manage counterparty risk as well as better safeguard and deploy cash reserves.

In a recent research paper by Fundtech, the firm warned that banks that ignore the need among companies for improved liquidity management advice and services are potentially jeopardizing long-term client relationships.

"Banks that fail to offer their corporate customers liquidity management solutions are putting their most important client relationships at risk," says Gil Gadot, head of global cash management and co-author of Fundtech’s research paper. "Helping clients optimize the management of their liquidity can result in long-term opportunities for fee income and service revenues," he adds.

Accordingly, many of the big commercial banks are focusing in on this area, and have been for some time.

 
Tom Schickler, HSBC 
Tom Schickler, global head of liquidity and investment products, payments and cash management at HSBC, says that concerns about counterparty exposure and deployment of cash holdings "continue to play a significant part in treasurers’ and CFOs’ thinking."


He adds: "Corporates have heightened their focus on securing alternative liquidity sources and are taking an increasingly global approach to self-funding solutions that enable access to cash and optimize the interest returns and costs. For many companies, the emphasis remains on evaluating and managing risk versus seeking yield enhancement. Companies today are asking for more granular information on banks’ counterparty risk, investment horizon, cash and banking structures and systems resilience."

Yera Hagopian, managing director, head of liquidity solutions, Barclays Corporate Banking, shares this view. "One of the main impacts of the financial crisis has been to increase treasurers’ awareness of liquidity risk in all its guises, ranging from availability of credit in the market to the accessibility of investments," she says.

"The importance of internal funding as a sustainable source of working capital has grown, notwithstanding the low-rate environment," says Hagopian. "The low-rate environment will also end one day, making the focus on liquidity management tools and techniques an even greater imperative."

However, companies of all sizes are faced with challenges and often find their efforts to achieve visibility on liquidity thwarted by a lack of integration and connectivity between the banks they use.

As such, Schickler says that companies are spending more time deciding on how to balance the benefits of consolidating their cash position with the need for bank counterparty diversification.

Most corporate treasuries now have a core enterprise resource planning (ERP) system, and these systems integrate the central treasury with the business’s subsidiaries, Fundtech says.

But this integration is not mirrored between banks, making it harder for corporates to maintain a clear view of interbank payment flows. This lack of bank-to-bank visibility reduces the efficiency of corporates’ liquidity management, leaving money dormant in different accounts.

The problem is being tackled by the banks, according to Schickler. "A new generation of sophisticated and broad-reaching liquidity management practices can deliver visibility, control and access to flows in a diverse range of markets and currencies, helping to overcome the effects of a low-yield environment through maximized self-funding and reduced cost of credit," he says.

Banks offering liquidity management services have the products and footprint to deliver efficiency and value to a company’s trading, treasury and working capital models. This enables corporate treasury to broaden their control over advanced treasury models such as in-house banks and shared service centres, Schickler adds.