The eternal struggle of the bank treasurer

Louise Bowman
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Bank treasurers are trapped in a nightmare of never-ending regulatory challenges. From second-guessing capital treatment to understanding new rules on liquidity, their work is more important than ever to the overall health of the banks they serve. The one bright spot: at least funding markets are open to them.

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If Euromoney had sat down with a group of bank treasurers just after the markets crashed in 2008 and asked them to name their number one concern, it would have been new banking regulation.

Seven years later, when the magazine did just that over the summer, their number one concern was… new banking regulation.

It seems incredible that the regulatory environment is still so opaque. Spend any amount of time talking to bank treasurers and their exasperation that the dialogue has not changed becomes all too clear.

"One year ago we were at the beginning of the finalization of [Capital Requirements Regulation and Directive] CRD IV and we thought regulatory uncertainty was behind us, but it wasn’t," says Stephane Landon, head of group ALM and treasury at Société Générale. "We have to deal with it."

Patience is wearing thin. "Regulatory changes complicate the job, both for us and for investors," says Carlo Pellerani, group treasurer at UBS. "Not having absolute clarity affects the situation, but because there is so much liquidity in the market this hasn’t been as damaging as it could have been. It is our hope that there will be regulatory clarity before this liquidity dries up."

The market volatility of 2015 makes such hopes increasingly remote. The extent to which this volatility barely makes it onto the radar of many treasury teams’ principal concerns is, however, quite striking.

"I am more concerned about – and spend much more time on – regulation than I am about market volatility," says one US commercial bank treasurer. "In the time that I have been in this role there has been a massive shift in focus to regulation. It has been all regulation, all of the time."

It is of little surprise that the strain is starting to show. "People are doing their jobs and then on top of that they are dealing with regulation," he says. "There is therefore a big focus on keeping people motivated and keeping them energised. People can get discouraged and run out of gas."

Having spent the years since 2008 focusing on building up their capital buffers, banks are now faced with the dual headache of leverage rules and looming Total Loss-Absorbing Capacity (TLAC) requirements, never mind further potential Basel IV changes in treatment to risk-weighted assets.

In the US, the results of the Federal Reserve’s recent Comprehensive Capital Analysis and Review (CCAR) released in March this year show that the average common equity capital ratio of the 31 bank holding companies reviewed has risen from 5.5% in 2009 to 12.5% at the end of last year. That is an increase of more than $641 billion, which brings aggregate common equity capital at the banks to $1.1 trillion.

But the job of raising capital is far from complete.

In November this year the final TLAC rules are due to be announced at the G20 meeting, with the aim of ensuring that there is sufficient firepower available to resolve every globally significant banking entity from 2019 onwards. Loss absorption will be in the form of internal TLAC, which is subscribed by entities within the group, and external TLAC, which is sold to investors. Treasurers need to be involved in both efficiently allocating the former and opportunistically tapping appetite for the latter. The problem is that the rules governing both are far from set in stone.

"The challenge is that as soon as you have climbed one regulatory hill then the next one is already looming," says Rogier Everwijn, head of capital and secured products, treasury at Rabobank Group.

This presents bank treasury teams with a perennial dilemma: try to get ahead of the regulators and anticipate change, or err on the side of safety and take a wait-and-see approach, which could see you lagging your peers when regulations are eventually finalized.

Both seem fraught with pitfalls. The best-laid plans of any bank treasury team may be sent back to the drawing board with each new utterance from the regulator.

"In 2012 we formulated our capital structure in anticipation of bail-in regulations," says Everwijn. "We thought that bail-in could be a threat to our funding and banking model. We wanted to operate at high capital ratios and minimal 20% to protect bondholders."

The Dutch bank has been at the forefront of innovation in bank capital and first sold contingent capital bonds, or CoCos, in 2010. However, the threat of new rules meant that the 2012 plans had to be revisited.

"Over the last year we have reformed the capital programme in reaction to TLAC and are now looking for mid-20% capital levels. We have doubled our capital base since 2009," says Everwijn. According to Dealogic, Rabobank was one of the 10 most prolific global FIG issuers in the first half of this year, having issued $16.3 billion by July 21. It is far from one of the 10 biggest global banks.