Banks become more selective
For one, the increased cost of capital brought about by higher equity ratios is likely to make banks more selective. There are clear signs that they are beginning to take a close look at who their customers are and where they operate. Smaller firms and challenging geographies are particularly likely to feel the impact.
Our banking partners are also having more discussions with us about the products we use since the new regulatory requirements shape how banks have to account for them on their balance sheets. A simple example is what balances are deemed operating cash and what is wholesale funding because the latter carries extra capital weight. This may incentivise banks to promote products that are best for their capital structures rather than the ones that are best for ours.
Low interest-rate environment causes strains
Subdued economic growth in many parts of the world and low bank profitability, partly brought on by extremely low and sometimes even negative central bank interest rates, compound the conundrum faced by banks. There is no doubt that the global banking system, already weakened by years of deleveraging, will continue to adapt as a result.
Even though global financial markets are flush with liquidity thanks to ultra-loose monetary policies around the world, which is creating benign funding conditions for corporate treasurers, the downsides seem to outweigh the benefits.
Growing regulatory burden
We as corporate treasurers must stay alert to these developments. The regulatory wave in the wake of the financial crisis has led to higher compliance burdens for treasurers already as new rules ranging from derivatives reporting to Know Your Customer (KYC) requirements have been added. But growing bank regulation may have an even bigger effect on us in the long term, forcing us to stay abreast of them as well. This has turned monitoring regulatory developments almost into a full-time treasury job.
The regulatory wave also reinforces some of the risks corporate treasurers need to monitor constantly. Given the implications for banks, interest-rate risk is certainly a development to keep an eye on, especially since there is a distinct possibility of increasing monetary-policy divergence through more rate hikes in the US compared with no change or even further rates cuts in the euro zone.
In addition, the challenges posed by regulation to banks potentially heighten counterparty and funding risks for treasurers. Banks that decide to withdraw can leave holes that some corporate treasures may struggle to plug. Seen this way, it is almost moot to ask if the regulatory wave has run its course. Whether or not there is more to come, it has decidedly changed the environment through which corporate treasurers must navigate their businesses.
This blog is part of Managing risk in challenging economic times, a new research programme by The Economist Intelligence Unit and sponsored by Deutsche Bank. A white paper and an infographic, based on a survey of 150 corporate treasurers and 150 CFOs, were launched at the EuroFinance conference on International Treasury & Cash Management in Vienna, Austria, and on EIU Perspectives on October 12th 2016. The programme also includes a video interview with Tony Glasby.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
