With all the controversy surrounding Brexit and its possible knock-on effect in Europe, many of the big risks corporates are facing in the next 12 months are being forgotten amidst the fear that Britain’s vote caused. Wherever your treasury is located, Brexit may well affect your funding plans; it could impact your bank relationships, perhaps your credit rating, your cash flows and your liquidity structures, where you place your header accounts and so on, but the reality is that no one yet knows how.
In the same way, the attempted coup in Turkey is just the latest manifestation of the geopolitical upheaval affecting developed and emerging markets alike. But companies have limited choices faced by this kind of threat: stay or go. Any risk management in those circumstances is really a decision about risk transfer: what kind of insurance is available and at what price?
In the meantime, treasurers must focus on the risks they can measure and mitigate.
EuroFinance’s ongoing research with senior corporate financial community has identified three key macro-threats to business that represent ‘super risks’ that you must confront in 2017: cyber-security, regulation and continued upheaval in the banking sector. These impact every aspect of companies’ activities and they can only be managed if they are understood. Unlike traditional financial risks though, these risks are not amenable to easy spreadsheeting. They require practical and pragmatic approaches as much as deep analytics. Here the numbers can take too long and lead you astray.
Three years ago treasurers didn’t rank cyber security in the top 10 risk management threats they faced. Today it is number one. Hardly a surprise when basic email scams have netted cyber thieves €42 million from the finance department of FACC and SWIFT itself can under serious scrutiny after the $81 million Bangladesh central bank heist. There are three basic problems. First, are treasury systems themselves cyber-secure since many of them were designed before security was a priority? Second, since most successful cyber attacks use employees as the ‘threat vector’, how do you secure your staff? And third, since the other best way into a target is through its third-party suppliers, and treasury’s key third-parties are banks and payment systems, how can treasurers be sure that they are not exposed via their most trusted partners? These risks can be controlled and they need to be confronted today.
Treasury can also respond proactively to regulatory change. The continuing OECD BEPs initiative has profound implications for standard intra-company transactions, cash management structures and the profitability and structure of digital businesses. So do the proposed US Treasury Regulations under Section 385 would have profound impact on related-party financings. Money market reforms, especially in the US, are ongoing and will likely contribute to the wider problem of ultra-low yields on cash balances faced by corporates today. The FASB proposals on credit losses on financial assets will affect core treasury structures across trade finance, leasing, supply chain finance and more.
There are changes too in Asia as the volatility of capital flows forces governments to act. And the Chinese regulatory environment continues to change: China has announced some conditional lifting to its suspension of net capital outflows from the cross-border renminbi cash pools in the country after an anti-arbitrage drive.
But perhaps the most direct big-picture risk faced by treasury is the transformation of the global banking industry. The combination of regulation and the economic environment began the change. The effects of Basle III are now becoming clearer: forced to increase capital and to reassess profitable clients and activities, banks have been de-globalising and shedding relationships that do not deliver returns.
More perniciously, ultra-low rates have multiple levers for depressing profits: a flat yield curve destroys the basic lending business; negative yields on central bank deposits and some bonds create costs that cannot be passed on to depositors without making their savings rates negative too; and as maturing government bonds portfolios are replaced with new, zero yield paper, another 20% of traditional bank profitability will disappear. Some banks (and insurers) are even considering keeping deposits on physical cash to avoid losses.
This lack of profitability is not temporary and it fundamentally alters the pricing and availability of services across transaction banking, funding and corporate finance. Treasurers must adapt quickly.
FinTech is continuing the pain by cherry picking the juiciest fees in areas like payments. These agile, new start-ups – some now large and mature – have begun by piggy-backing off bank infrastructure and offering user-friendly service layers in place of the banks’ clunky legacy systems. The next stage will be the creation of parallel systems that cut the banks out even more, systems based perhaps on the blockchain.
Again, treasurers must understand these changes and how they affect their access to core treasury functionality. The counterparty risk posed by banks’ declining profits and ability to keep pace with technology, together with that created by their cybersecurity profiles, remains a super-risk treasurers must and can manage.
Want to know what to DO about it?
These super risks will be explored in detail at EuroFinance’s gathering for treasurers from around the world:
The International Treasury, Cash and Risk Management Conference 12-14 October 2016 in Vienna, Austria.
- Come and meet the Fintech companies launching competitor and partner businesses to your banks
- Test your robustness in our cyber security workshop
- See Treasury Talks on six pieces of regulation as well as a full afternoon workshop on tax
- Listen to over 50 corporate case studies from companies tackling fx risk, funding, working capital, forecasting, pooling, OBOs, payment factories, inhouse banks, TMS selection and implementation.
- Join the Treasury Innovation Lab where banks, corporates and fintech companies will explore solutions in payments, supply chain, trade and FX.
This is the most comprehensive treasury and risk event where close to 2,000 treasury professionals meet and network.