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Liquidity management stress causes bank-to-corporate tug of war

Stresses on banks are forcing change on how corporates run their cash management operations. For business to continue running smoothly, it will require some give and take from both sides.

Deutsche Bank’s Liquidity Management: Thriving in a New World whitepaper points to the importance of strong liquidity management for corporates at a time when banks don’t want to take short-term deposits from clients with surplus liquidity, or supply low-cost working capital credits to those with short-term borrowing needs.

The report highlights how the combined impact of Mifid II and the Basel III leverage ratio, along with the low-rates environment in Europe, US rate hikes and ECB quantitative easing, is hitting the banks. 

Corporates are advised to understand how “circumstances have changed for banks”, and that this must affect their own practices. 

“Treasurers must adapt their strategy and tool box, and draw on this support, to best equip themselves to survive and be fruitful in the new environment,” the report concludes.


Andrew Burns, C2FO

Andrew Burns, director of business development at C2FO, says this changing dynamic is not always going smoothly. 

“There is a struggle to understand the adjusting relationship between corporates and the banks to help them both understand the current uncertainty," he says.

“The overall cost to the banks to adopt regulations is huge, and the current squeeze on margins creates a challenging business environment. Even some of the largest banks are still in an exposed position.”

Concerns centre on the practicalities of how to operate liquidity management in this environment, and how much support any corporate can now expect from its banks.

Lisa Rossi, global head of liquidity and investment product development at Deutsche Bank, says the banks need to go into the detail of how their corporate clients’ treasury operations work.


Lisa Rossi, Deutsche

“It needs to start with the treasury function, and how companies manage their daily operations,” she says. 

“Often, if corporates have excess funds they will leave them in a current account. Treasurers should prioritize understanding their operational flows; this will allow them to most effectively manage their short- and medium-term funding, ensuring optimal returns where possible.” 

However, C2FO's Burns says some advice from banks on how to improve returns is being oversimplified, as the banks are now much more preoccupied with their own problems than with those of their clients. 

“Longer deposits help, but this has to be balanced with the treasurers concerns on liquidity," he says. "They don’t want to trap cash in when they don’t know what will happen in an uncertain environment.

“That is where the yawning gap is. The banks are struggling through over-regulation, placing a stranglehold on their ability to run their business. This has a knock-on effect to the corporates.”

Shortage of funds

While some treasurers are struggling with excess funds, others are having the opposite problem. 

Jean-Marc Servat, chairman of the European Association of Corporate Treasures (EACT), says there is still more the banks could be doing to make the process easier for clients suffering from a shortage of funds.

“Banks could help more by providing liquidity to more risky corporates/SMEs, as it is the intent of the central banks' monetary easing policies,” he says.


Jean-Marc Servat,

The current constraints on banks are not the only ones corporates have to consider, as there are other potential problems beginning to develop. 

Says Servat: “The decreasing liquidity in the corporate bond secondary market is worrying as it is key to price new issues.” 

The banks have, however, been investing in technology. 

Deutsche's Rossi says: “Banks spent time and resources in updating processes. They have invested considerable money into their systems and into increasing automation and information for their clients. This has helped treasurers, in turn, to have more time to spend on the strategic elements of the job.”

Although the burden of regulation falls primarily on banks, it is not solely their responsibly to keep clients up to date.

Burns says corporates in need of additional information on what is required of them, or why their banks are asking them to make changes, have a pool of resources to draw from.

“Treasurers have multiple sources to understand the impact of regulation," he says. "They can seek advice from their consultants, advisory services, other treasurers and even other partner banks. Treasures are sensitive to the impact of regulations, or they risk being left exposed internally.”

Rossi says the larger corporates might find independent third-party help beneficial to selecting the best solutions.

“If a company is managing millions in operational flows, they may want to consider allocating a resource to review their investment policy and reconsider the products they can utilize and the duration levels that are appropriate in the current regulatory and economic environment,” she says.

The regulators themselves need to pay more consideration to how the rules they impose on the banks affect corporates as well.

Patrik Havander, head of strategy and communication, transaction banking, at Nordea, says: “There is an awareness of the difficulties numerous financial regulations create for corporates and other customers.”

He notes that know your customer, in particular, creates a huge amount of paperwork for corporates to complete.

Havander says: “We pride ourselves on providing a high standard of compliance, but we know from experience that some corporates are spending a lot of time fulfilling requirements. So we assume a knowledge and advisory role here and work on sharing best practices among corporates.”

Heavy handed

Burns agrees, saying if the regulators are too heavy-handed, it invariably ends up creating more work for corporates.

“If there isn’t an understanding of the impact new rules have by the regulators, we end up with situations like what was seen with Section 385 in the US, which could have prevented intercompany lending had it passed unchallenged,” he says.

Significantly, it was a wide-scale lobbying programme that came directly from the corporates that had the biggest impact in the US Treasury reconsidering those rules. Regulators still don’t trust banks and suspect all of their lobbying as being entirely self-serving for a discredited industry.

If corporates and banks are unable to find a satisfactory understanding to regulatory implementation, Burns believes it will creates an opening for fintechs to provide a real value-add service.

“Banks suffer from a monolithic inability to be creative, which is where the fintechs come in and give corporates another option," he says.

“Collaboration between the banks and fintech is the key to introducing new ideas. If time is spent educating the corporates on what is available and what is achievable, then things will start to move.”