Liquidity management debate: New tools needed for a post-crisis world
Corporate responses to the financial crisis are forcing banks with liquidity management services to come up with new tools and techniques. Clients are demanding more visibility, control and optimization.
Jack Large Let’s start with a little background on how this part of the industry has developed in the past couple of years. David?
DM, Barclays Over recent years the trend had been for corporates to concentrate with just one or two banks either globally or, more usually, per region. The crisis has reversed that trend as corporates now feel a need for diversification. So consolidation, driven by the desire for better returns and consistent standards, has been replaced by a focus on counterparty management and risk spreading. From the banks’ perspective, products have to reflect clients’ activities and needs. The prevailing principle is to give the clients visibility and control and then to help optimize liquidity.
NC, RBS Exactly. The crisis created a situation in which the availability of credit dropped and the price rose dramatically; this drove clients to tap the cash within their own organizations as a source of funding by recycling cash from cash-positive parts of the organization into the cash-negative parts. A lot of our product development is geared towards helping clients tap into sources of cash they haven’t looked at previously, cash that is available in the farther-flung parts of their organization. Right now, working capital management – and specifically liquidity management – is right at the top of our clients’ agendas; the three key elements of visibility, control and optimization are a focus today in a way that we have not seen before.
HP-W, Citi In addition, the larger, more sophisticated corporate treasuries have been increasingly successful at leveraging available cash – that is, self funding. What those corporates have been focusing on most recently is how to manage net surpluses within an increasingly robust risk framework, while also extracting more cash out of the emerging markets, due to their growth in absolute and relative importance to their business.
LC, BNP Paribas One of David’s points was that corporates are looking for safer places for their cash and also for credit, and this has meant diversification of provider. The banks are doing the same in the sense that, in exchange for granting credit, they want at least part of the cash management business. For a lot of smaller banks this was not the case until now. This means that you will see a gradual shift from having one or two global banks for cash management towards companies choosing more banks and then going regionally. The question is on which basis are they going to choose their banks and then for which regions? We think that having a local presence, a local expertise and a well-coordinated network is crucial. But what is significant is not simply the number of countries in which the bank is present but the depth of its payment and collection services.
PT, Intertek The fundamental is liquidity – having the headroom and facilities available at the right maturities and spread across the banks. Beneath that there is certainly a regional issue and no one bank fits all.
On the deposit side, it is return of capital as opposed to return on capital. If you are borrowing from a counterparty, then that is a good place to leave some of your capital and that is what the banks are looking for. Share of wallet is a big issue.
IA, Travelex I think it’s important to understand how different the past two years have been relative to the decade as a whole. The crisis has forced lagging corporates to catch up very quickly with best practice in cash management; so when we talk about access and visibility to cash across the globe, the more sophisticated corporates demanded that five or more years ago. Now the next tier down of corporates is chasing that regional cash as well.
Also treasury has been forced into becoming more involved in the working capital element of the whole business. Traditional treasury – liquidity, foreign exchange, bank relationships, headroom on your facilities etc – is no longer enough. Treasury now is forced into the business, looking at the whole end-to-end supply chain and cash chain.
In general, when I think of liquidity management I think: “The right cash at the right time in the right currency”, so you are looking at your exposure in the end-to-end process. And it is the bank relationship; who are you dealing with? Previously people concentrated on the more global structures, rationalizing their banks down to two or three. We pulled back from that two years ago.
HP-W, Citi Irene, I agree that the larger or more sophisticated corporates having been doing a lot of these things for a while. What I also think we are seeing is rapid change in emerging markets where many of the fast-growing, emerging champions are bypassing some of the traditional evolutionary steps of a corporate treasury or liquidity structure. They are often looking to put in place something that is close to a fully centralized model without going through multiple iterations to get to that point.
Jack Large In addition, the new focus on liquidity management implies increased centralization within corporates to maximize returns on group cash.
IA, Travelex Yes, that is important. Whatever your bank structure, whether you have chosen a regionalized, globalized or centralized strategy, if you can centralize and control as much of treasury and the cash elements across the business from a central point, the business has more visibility and control. While I may agree more with decentralizing some of the bank relationships, I don’t agree with decentralizing the treasury structure that copes with that.
Improving visibility
Jack Large So how do you go about achieving these three goals? Let’s start with improving visibility.
PT, Intertek Visibility is relatively easy in the industrialized nations where you already had cash concentration partners. The main challenge is how to get all that information into one place, when typically you have maybe five or more bank workstations. If you have a very large number of counterparty banks, how do you get visibility across all the accounts? What connectivity channel will you use? How much in additional bank fees will it cost to get global visibility? What are the documentation issues? This is a very laborious, expensive, manual process of trying to pull everything together.
IA, Travelex You need treasury workstations or your enterprise resource planning (ERP) system to automate the collection of this information as much as possible, without having to log in to multiple bank systems. You need the systems to collect the balances and to automate the processes that give you your liquidity positions.
Jack Large The move back to multiple bank relationships will complicate this?
IA, Travelex You either have the multi-bank relationship with an overlay bank, or you are using something like Swift to collect balances into your treasury workstation. It is almost as fundamental as starting with what banks are you dealing with, what are you doing with these banks and then how best to report those balances. It is a fundamental bank account database to start with and then what you can leverage out of your IT systems to automate that collection and analysis process.
HP-W, Citi Swift is the most robust and the richest method to get at that detail together, but there is a cost associated with sending these messages between banks. We work to have alternatives – different file formats – but ultimately we are talking about a multi-bank environment. We try to provide all the functionality – the integration, the aggregation, all that data – whether on an overlay basis or multi-bank basis. We are not trying to be a treasury workstation but we do want to help provide the tools to get visibility on as much of their cash as possible and move cash around, together with additional tools such as cash forecasting and so on.
LC, BNP Paribas Treasurers are looking for global platforms that encompass all the key functions, such as treasury forecasting, intra-day reporting, multi-currency cash pooling, efficient liquidity management, electronic banking account management and a mechanism for investing excess cash. If you can bring that all together into one place, you have more or less responded to the requirements of the treasury.
NC, RBS It is really about client choice. Not every corporate is going to want a bank-independent solution; some are quite happy to have a single bank solution. At RBS, we like to be flexible enough to make sure that we can help clients in either situation. From a reporting point of view, if we look at what banks provide, end-of-day and intra-day reporting is fairly common these days. Within our own front end we provide real-time reporting and we give clients access to the same information that we see within our own client service group, offering clients full transparency and a consolidated platform.
Jack Large Is real time important for the corporates?
IA, Travelex Yes, I think it is.
PT, Intertek It can be, certainly on the treasury accounts.
IA, Travelex You don’t need intra-day everywhere, but if you are looking at your major currencies, it certainly helps.
DM, Barclays In theory if you have the best of an international bank with the best of a domestic bank in all markets, you have the solution. I don’t see any client footprint that doesn’t need, somewhere along the line, a good, domestic offering. Then the challenge is how do you link them? What do we do with host-to-host? What do we do with client ERPs and so on? There are integration challenges from international to domestic, from multi-region, multi-country, multi-currency. Good channels underpin a lot of that – good connectivity with Swift, host-to-host ERPs – these are the mechanisms by which we improve the situation, but I don’t see a panacea at this stage and on the basis that every client footprint is different and every requirement is a composite need that is unique to each client.
Extracting liquidity
Jack Large Let’s move on to talk about squeezing liquidity out of the whole business. What are the opportunities?
LC, BNP Paribas The business operating cycle consumes cash. When turnover falls you need less cash in your operating cycle, because of the difference between inventory and receivables on one side and payables on the other side. The most difficult point is the moment where, coming out of recession, turnover picks up again and all of a sudden you are short of cash. If the procurement, sales and finance departments can work together better, this shortage can be minimized. The challenge is that the banks have created walls between cash management and factoring and trade finance. And companies often have walls between procurement, sales and financing. Breaking down these walls and offering fully integrated solutions is vital. You can use fancy words like ‘financial supply chain’, but it is the relatively simple things that create the most promising solutions.
HP-W, Citi One major opportunity is treasury getting deeper and deeper into working capital management. We did a survey last year and about 21% of respondents had full responsibility for working capital management within treasury and another 36% had ad hoc involvement. So a little over 50% had at least some involvement in working capital management, meaning that nearly half don’t. That is a large opportunity for making it part of the whole liquidity, the whole treasury management process.
Jack Large BNP Paribas has implemented a factoring programme covering four of the largest countries in Europe for a major European consumer goods company that released some €400 million of working capital liquidity in the first 12 months, achieved with no disruption to the client’s relationships with its customers. What other techniques are there?
HP-W, Citi We certainly see a growth in supplier finance techniques. There is a fairly broad church of applications: payment factories, payment on behalf of, leveraging the shared service centre attributes, if you like, not ignoring some of the basic liquidity management tools that are available: pooling, for example, from a self funding point of view. We have seen a huge growth in the number of clients that are using pooling to offset their balances.
IA, Travelex Some of it is about basic discipline as well. You would be surprised how many organizations don’t pay their suppliers on time and don’t do anything if they don’t collect their receivables on time. That is about discipline. EDS was able to renegotiate on receivables and payment terms. The size of the company allowed it to have flexibility over its customers and vendors but then it was about instilling simple discipline and best practice across the business.
DM, Barclays The key to supply chain financing is understanding what the client is trying to achieve. Some are aggressive and want to use it to extend credit, or squeeze pricing; others use it to secure suppliers. Then there are the steps needed to achieve it: stock control credit inventory, insuring debtor books, factoring, forfeiting and so on. The important thing to understand is that it is as much about operational issues as it is about specific financing tools.
NC, RBS We took a survey on this towards the end of last year and about two-thirds of respondents said that their main way of extracting liquidity from the working capital cycle was renegotiating payment terms.
We are also looking at supply chain finance in conjunction with cash management services, for example bringing together supply chain finance with things like centralized payables. In any centralized payment file there will be invoices that have already been settled under the supply chain finance programmes and some that haven’t. Rather than the company having to manage that, we have taken a lot of that in-house and are doing it for them within our systems. To facilitate the consolidation of trade and cash, RBS has also developed the automated integration of our host-to-host payments platform with our online trading platform, helping clients by providing them with just one interface and one channel.
DM, Barclays Increasingly banks are being seen as one of the debtors, meaning that companies are starting to manage bank positions quite aggressively. That has become a part of the working capital cycle that wasn’t attracting attention in the past.
Releasing trapped cash
Jack Large Let’s talk about how companies can release trapped cash globally – it’s a big problem and the potential rewards are significant.
NC, RBS There are two ways of looking at the problem. One is releasing the cash. This is often not feasible because the money can be trapped for FX control reasons, or because there are unfavourable tax regulations and so on. You may be able to come up with individual solutions to get cash out of any given environment, but due to the one-off nature of this type of solution, we focus on the other ways of looking at this issue, which is how we can help our clients extract the most value from that cash while it is trapped.
RBS offers two types of cash optimization techniques. The first is an enhanced interest programme whereby we take a portfolio view of balances dispersed across our network, and we pay an interest benefit based on that portfolio balance. The second technique, which is used a lot in the US, is the earnings credit rate, whereby you calculate an interest benefit based on a balance and clients use that interest benefit to offset banking fees. Increasingly clients are asking us to provide these solutions on a global scale, so we’re looking cross-regionally at balances they hold with us across these regions.
IA, Travelex So you don’t ask them to hold, say, US dollars in the US or in another jurisdiction?
NC, RBS No, this is currency independent in that you could have a currency balance with us in whatever country; we take a portfolio view over all those balance positions in whatever currencies that you hold with us and we calculate the benefit accordingly.
Jack Large Why do you ask the question, Irene?
IA, Travelex Just a couple of years ago when cash optimization was first introduced to me, one of the banks that talked about it was very keen to have you holding dollars. I suppose they wanted that sort of cash offset to allow them some sort of benefit for offering that type of cash optimization. I didn’t see the point in it then, because if they were holding dollars you were losing the benefit of those dollars.
HP-W, Citi Our approach is to provide a mechanism for releasing cash wherever possible, whether it is with a Citi branch, or a third party, assuming that is the client’s ultimate goal. Here our advantage is having people in the markets with intimate knowledge of the rules and regulations. Often cash is trapped not just because of a hard and fast regulation; it is local practice, things that can reduce the velocity of getting cash out of the system.
In addition we do provide interest optimization services in which we pay some kind of reward for cash that cannot be released. That also includes how you cater for joint ventures and other structures that have their own potential problems or restrictions on moving cash. We work with clients to sweep from joint ventures on a percentage allocation basis and other ways to release that cash.
Jack Large Corporates, does this make sense?
IA, Travelex Absolutely. Obviously there are ways that we ourselves can release cash: dividends, lending to sister companies within the same country and, after those types of technique, then interest optimization. Then you look to your preferred counterparties to where you would like to place that cash as well. After that, your cash is trapped.
Jack Large By preferred counterparties you mean local money market funds, for example?
IA, Travelex Exactly.
PT, Intertek It would be interesting to see what you can do within the Bric countries [Brazil, Russia, India and China] as far as having a global multi-currency cash pool. You read about products, but I haven’t seen anything yet that seems to meet my requirements.
DM, Barclays Well, there has been a natural evolution of basic currency pooling – offsetting debit interest against credit has moved a long way. Banks’ ability to bundle services and offer offsets has developed significantly and it is increasingly how you offset money transmission fees, FX spreads and so on. There is a broad raft of innovation going on in the banking sector on how you provide value for frequent users. The more business a corporate does with a bank, the more they will offset certain products and services, using potentially liquidity as one of the make-weights in the transaction.
LC, BNP Paribas To respond to Paul. Unlocking cash trapped from certain countries such as China or India is a real challenge. To support our clients in China, we offer solutions in line with the local regulatory guidelines for entrusted loan. In India, we offer local solutions to optimize treasury such as reverse sweeping which enables you to concentrate cash overnight.
HP-W, Citi And these regulations are often not in a readily absorbed form, they tend to be complex documents from multiple sources, before you even start on different languages.
NC, RBS The approach you tend to see is companies focusing first of all on the fungible currencies, and building liquidity management structures around those currencies first and then dealing with those trapped-cash countries.
PT, Intertek Sometimes I feel that the banks know little more than the corporates in some of these difficult markets and I would like better cash management advice for that specific country.
NC, RBS I take your point, Paul. As a network bank we do have people on the ground and we do keep up with regulations in each market, but one thing that you have to bear in mind is that some of the techniques that we are talking about have never been tested in certain markets before. Often we find ourselves having to go to the central bank in any given country and explain what we are trying to do before we can develop and implement a specific proposition.
DM, Barclays We often try to look at a regional advice rather than going to individual countries, to try to save us this work at an aggregate level.
HP-W, Citi When we are responding to a request for proposal, we try to provide meaningful information about our understanding of the regulations and we can provide fairly detailed information if required. We suggest and propose particular structures that we believe match the specific client requirements against that understanding of the regulations and practices. That knowledge is the result of research and practical experience of implementing similar structures for similar clients.
Cash concentration
Jack Large Let’s move on and look at developments in concentrating cash. This is what used to be known as liquidity management. What are the latest developments?
NC, RBS Remember that we all agree that the core of this discipline is visibility, control and optimization. With cash concentration, we are mainly talking about control. More and more we are being asked to take techniques that are long established in, say, Europe and apply them to other regions. We are looking at how we can help clients pick up Asian balances using exactly the same techniques we are using today, the traditional end-of-day, same-day value, sweeping arrangements, but for Asian currencies, to give our clients opportunity to tap into more cash that they have in other regions, in a way that they are familiar with.
Jack Large In a multi-currency notional pool?
NC, RBS Exactly. Notional pools have not gone away, but they have changed their form: single-currency notional pooling is a very mature product. Cross-currency notional pooling is something that is of huge interest to our clients at the moment. It has grown from being European to being global. We had one client set up a cross-currency notional pool with us six years ago. Once that was up and running, they then started managing their Swiss franc position and some other central and eastern European currency positions with us, to a cross-currency pool. They then added north America. This is how clients evolve their cash concentration.
LC, BNP Paribas We see more and more a combination of a multi-currency notional pool and a physical pool. You may use a notional pool for the cross-currency and then add that to a physical pool. For smaller companies, for which it is still difficult to centralize cash from different subsidiaries in the different countries, notional pooling is a natural first step. We provide a notional multi-currency offer throughout our European network. Our real added value is that this solution is easy to implement. At present we are also focusing on developing notional pooling in Asia. In terms of physical pooling, we offer a homogeneous level of services in all continents. We are now working on further developments such as end of day sweeping with same day value sweeping. The booking date is the same for the sweeping and the commercial transaction swept.
As for real-time information, we offer our clients intra-day reports, enabling better monitoring and global visibility of cash positions at any time of the day.
DM, Barclays This is still very much the value end of town. If you can offset any credit balance against any debit balance, that is where clients can capture the most basis points.
HP-W, Citi At Citi one of our main areas of focus on cross-border sweeping is about ensuring as consistent a service as possible. We are sweeping across multiple banks, ensuring that the platform is doing exactly what the client expects and that it is consistent in terms of timing and reporting information and so on.
In terms of notional pooling, though it is a mature product we have seen significant growth in the use of single-currency notional pooling across our clients: in the last nine months there has been a 30% increase in clients using notional pooling for the first time or adding to pools. Within that number we have seen a doubling of client offset or balance offset within those pools, that is, doing what many people would like you to do, which is self-funding using the long balances to cover shortfalls.
On top of that we are seeing more interest in multi-currency pooling, with clients now looking to move from existing single-currency pooling structures into a multi-currency or overlaying single-currency structure with a multi-currency one.
NC, RBS There are issues though. Corporates used to do single-currency notional pooling principally because they didn’t want to create inter-company loans, and they wanted to keep funds separate. If you look at cross-currency notional pooling, you are using the term notional pooling, but you are not necessarily creating cash pools that don’t create inter-company loans; these pools are about managing different currencies rather than single-currency notional pools.
HP-W, Citi Sure. I think the distinction is where a client uses Citi’s own network, they are within an infrastructure that sweeps cash truly end of day. Where it is outside of the Citi network, we have invested in ensuring that capability is still as robust as possible. These multi-bank transfers automatically sweep from third-party banks as late in the day as possible, fed by the best information obtainable from those third-party banks. On the resulting pool, we provide the usual set of cash management products, whether it is physical sweeping, notional pooling and, increasingly, multi-currency pooling. And then we provide options for the investment of any net balances where clients are sometimes looking for us to provide an automated capability to take the cash out of the pool and place it into another Citi product or to put it into a third-party product, often to achieve their goals or diversify that cash across multiple counterparties.
LC, BNP Paribas What we are particularly looking at is expanding our capabilities in the countries we operate in. For example in Europe this means being connected to 30 local clearing systems, offering more domestic products and making sure that customers do not have to go to another bank. Where the client chooses to use another bank, then we have the classic techniques of multi-bank reporting, payment initiations, zero balancing and so on. Last, but not least, we find that clients still value facilitation. Let’s take for example the opening of a new account for a subsidiary in another country. Doing this with another local bank or even with a branch of their own bank still creates a lot of hassle for a company having to explain over and over again who they are and what they do. We offer a quick solution to open within a very short period of time accounts in other countries, where the manager takes care of all the administration.
Generating returns
Jack Large Finally to investment itself. Clients are spreading balances around rather than choosing one or two concentration banks and they are keeping cash short term. How does this affect their and the banks’ strategies?
NC, RBS RBS is being asked for flexibility in investment proposition by corporates that want to keep their cash very short term. Effectively clients are looking for a term rate on money that they will likely deposit for the term but on which they also want instant access. To do that we have to closely watch the behaviour of the liquidity deposited with us to decide what prices we can offer on the basis of that behaviour. Then we can give the comfort of instant access with the yield people are looking for.
DM, Barclays Exactly. The more we have to deal with short-term money, and increased competition for it, the lower the returns available to clients. Money comes in and we put it on reserve. This affects cost of funds so it hurts the borrowing clients as much as it dilutes returns to depositing clients. The way forward is to ‘behaviouralize’ liquidity – pay according to behaviour – this is how we overcome heavily diluted returns to clients in the short term. Clients are having to articulate their relationship position with their banks much more formally to say: “If I have a cash call, I will take it from bank number five first of all, then four, then three and so on”; the different banks will pay on a different basis depending on that.
Jack Large Isn’t there a conflict then between clients’ desires to maximize returns and their desire for diversification for risk management purposes?
DM, Barclays It is a very clear point. Clients can choose with whom they transact, but they then need to take into account the degree to which they can optimize the terms by keeping liquidity long-term with certain providers. The client decides, but the routine overnight, overnight, overnight can be quite labour intensive. If you have to make a decision every night on how you place $63 million or whatever, what we try to do is say: “Find a comfort level with each of your providers and, if it is Barclays, then you get a certain level of return just on an overnight deposit”. If you leave it longer, you get some behavioural benefit: you might offset it against your payment tariff, you might offset it on your FX; there are so many more sources of value than purely what you can get in the market for that money. That is the essence of relationship-driven opportunities.
Jack Large Have you corporates changed your behaviour and has this had an effect?
IA, Travelex We have certainly changed. We no longer centralize cash with one preferred provider, we now look at our top relationship banks and, having centralized our funds, we look at whom we want to reward with our deposits. We choose based first on counterparty risk and only after that do we look at yield. We are also more sophisticated about tenor – about what we need short term and what we may not need for three months or six months. I don’t see us going out any further than that because the priority is to pay down debt, this happens a couple of times in the year on planned dates. So the banks benefit from that.
Jack Large Aside from behaviouralizing client balances, what else can banks do to cope with this new environment?
HP-W, Citi The fundamental point is giving clients a choice. As a cash management bank, clearly we are happy to provide services that keep cash on our balance sheet. The reality is that corporates are looking for choice. In addition to Citi’s own balance sheet, we have an investment portal approach. Does a corporate make a choice between use of a portal or use of their banks’ own network? At Citi we try to cover both, so we will be there as the cash management bank, but also we have an investment portal. This gives direct access to fixed-term deposits and other instruments with Citi, and access to 10 different offshore money market fund families, and further funds in the US. We also have the ability to invest into other asset classes such as third-party bank obligations or repo.
In terms of cash management techniques, we are increasingly linking these broadening investment options with automated sweeps from client accounts, so we have the capability to say: “Here is a balance that can now be split, potentially, 10 different ways into 10 different money market funds”; and the client can set rules around that, whether it is percentage or hard limits and so on, effectively treating the funds like counterparties as well, setting a maximum holding against a fund.
LC, BNP Paribas We are developing this too as client demands evolve. Previously clients would deposit money without too much dialogue. Now clients make decisions based on counterparty risk and on yield – they make a true risk/return judgement. Products of that sort were not routinely offered to treasurers in the past but now there is a lot of potential in developing products that allow treasurers to define those parameters for themselves.
IA, Travelex About 18 months ago we used a single portal for all our money market funds and, as part of our risk assessment across the group, we decided we also needed direct access to all the funds so we went from using the portal to direct access. We are now moving back more towards the portal because it is more convenient. We are still very risk averse, be that counterparty or principal. We are not as strict as we were 18 months ago, but safety of principal is our primary driver.
NC, RBS The key drivers we are seeing are having cash very short-term and risk management. At RBS we want to make sure that we pay a return that is commensurate with the length of time that we have the cash for, as well as giving instant access to that cash. Clients also want convenience and want to minimize the cost and effort associated with settlement and reconciliation of their short-term investments. Those four factors are driving us to develop some very flexible short-term investment products.
We too have our own portal, which has a variety of short-term investment instruments. We also have a multi-bank money market fund portal. Our approach is slightly different from what I have heard. We are currently developing an end-to-end liquidity management portal.
Jack Large What does that mean?
NC, RBS As well as providing a variety of short-term investments, it will also include all the information services and the transaction reporting around pooling, the sweeping, all the associated interest reporting and a variety of self-service tools that allow clients to configure sweeps very precisely themselves; all that, along with the short-term investment proposition, to bring together a complete liquidity management portal for the client.
IA, Travelex It’s clear that tenor is a key variable for banks right now. We have encountered banks looking for us to give notice on when we will withdraw funds. The rates are relatively beneficial to us and it is about us being smarter about how we term our funds out, but I wonder if that is going on across the board?
HP-W, Citi Basically there continues to be significant interest in deposit products that reward balance stability without necessarily giving up all access to liquidity. These account-based investments typically pay more than overnight operating accounts, but give the client the comfort of instant access if funds are needed unexpectedly. The bank is often able to pay a higher return as it benefits from a more stable book for its own balance sheet management – a win-win.
DM, Barclays Banks recognize that a majority of their clients are loyal and are working with this group to ensure that, while product development meets the welcomed tighter liquidity controls, features of certain products allow customers to continue earning higher interest rate premiums. Being open with clients about when we need to hold liquidity buffers (and when we don’t), we can encourage both a mix of longer contractual and longer behavioural profiles – for example by introducing notice accounts or by deferring part of the interest payment as a future loyalty reward.
PT, Intertek There has always been an element of paying for convenience when placing deposits with your core liquidity banks and accepting that there may be a diminution on the yield when you are placing funds compared with a pure competitive bid. These structured types of deposits have not been of interest to me in the past, although the prospect of enhancing yield through offset of bank fees is interesting, though I’m sceptical as to how beneficial it proves in practice. It will be interesting to see how it plays out when looking at some of the structured deposit products that banks will develop as a response to Basle III versus the liquidity funds of the past.
DM, Barclays There has never been any great long-term value for any banks or clients for that matter in the auction of who can pay the most on any given day. There is no longer value in that to anybody, so we would have had this type of dialogue long before Basle III.
Jack Large The other thing banks are doing is creating intra-day pricing – effectively almost hourly interest rates, which has been suggested in the past by the FX markets. Deutsche in particular has different pricing structures depending on when you make the payment.
DM, Barclays Yes. Payment systems like Crest and CLS, and the banks do have different patterns of when in the day they go long and short and if a client matches the opposite side of the bank’s position perfectly, they can be very heavily rewarded for that, ie, covering a bank’s short position early in the morning and vice versa. It is quite bank specific, so one bank may just be in a position to offer value – often to a non-bank financial institution rather than a corporate.
Jack Large Is there a corporate opportunity there?
DM, Barclays I would say so, yes. It is a dialogue we have had with clients. There is a lot of work going on around the cost of intra-day liquidity and intra-day funding; there are costs that banks are bearing that they are not passing on, but there are benefits that the client can bring to the bank for which value can be given.
