Before the financial crisis hit, most companies were seeking to create efficiencies in their treasury operations by selecting one or two key banks per region for all their treasury services.
An example was a treasurer at a 2007 conference who claimed that by consolidating their global banking relationships to just one per region, they were saving billions. The savings were not only in the incentives offered by the bank to regionalise relationships, but also by reducing the number of counterparty banks and operations they needed to connect with. The drumbeat of the treasury market was to reduce complexity, reduce relationships and reduce costs.
Then the crisis occurred and bank liquidity disappeared. What followed was a period of highly strained relationships between corporates and banks. Large corporations fared better than small to medium-sized enterprises, but even the large organisations changed their tune. From consolidating relationships, these large enterprises have worked hard to reverse direction and ensure they can hedge their relationships. Hence, two banks per region or even per country is becoming a far more common mantra.
This is in order to ensure they can gain access to credit and exchange services, trade finance and working capital services with ease. The cost may be higher, but for many the certainty of provision of finance is more important than costs.
Even more important is the need for trust.
Banks have a mantra of KYC – Know Your Client – but corporate treasurers are turning this around to KYB – Know Your Bank.
The bank KYC is all about the avoidance of penalties from regulators by dealing with money launderers or terrorists. The bank has to prove they investigated their client enough to ensure they really are who they say they are, and that all is above board in terms of dealing with credible, worthy and honest customers.
Rebuilding trust and relationships with banks is now the key to future rationalisation of treasury operations
The corporate KYB involves treasury operations investigating their bank providers, to make sure they can be trusted in good times and bad. When the crisis hit the global markets, access to loans and credit disappeared for most. In some cases, banks went to extremes and were even accused of forcing some companies into bankruptcy by shutting down access to short-term financing, causing the firms to be unable to acquire inventory, while devaluing company assets and calling in long-term loans.
Such actions destroyed any trust in such banks, and rebuilding trust and relationships is now the key to future rationalisation of treasury operations.
So what does a company really want from their bank?
These things are summarised by the Association of Corporate Treasurers as being fair, open and transparent; to provide clear and concise communications in plain English; to provide choice and recommend the right products for their business needs; to be proactive and relevant; and to show respect and clearly demonstrate the bank has researched the company and its requirements.
Interestingly, the key here is to be a trusted adviser – one who puts the customer’s interests first. This is something that again has broken down when you hear of Goldman Sachs referring to customers as “muppets” or that high-frequency traders regularly use “flash trading” to game the markets.
The former reference comes from a letter by a 12-year veteran of Goldman Sachs Greg Smith, who stated in his resignation letter that, “over the last 12 months, I have seen five different managing directors refer to their own clients as muppets over internal e-mail”.
The latter is the focus of Michael Lewis’s new book Flash Boys, which has picked up on the theme known in the financial markets for some time that brokers acting on behalf of clients can easily increase their returns by buying and selling shares seconds before their clients buy and sell the same shares through their computer systems. In so doing, the broker makes a few cents on each trade, which may sound like an irrelevance, but when you’re talking of millions of trades per day, it soon amounts to a decent daily profit.
These are areas being investigated by regulators, but the due diligence of a treasurer to investigate and ensure that their bank can first be trusted and second be trusted for advice has never been greater.
So what should a treasurer do and, more importantly, what should they ask of their bank?
Most treasurers just want some basic services. They want banks to show them how to sweat their assets; enhance and unlock shareholder value; improve their working capital; and ease the supply chain. What they tend to get is product sales-focused bank-relationship managers, who concentrate on the bank’s needs rather than the customer’s.
I would suggest any treasurer should ask their bank the following questions and see if they get answers:
• What does my company do? See if your bank understands your business.
• Which are the key markets we operate in? See if the bank knows your main countries or areas of operation.
• What is the most efficient way to deal in those markets? See if the bank can tell you how to get the most efficiency in currency exchange or local services in those countries and areas of operation.
• What can you do for me? See if the bank tries to sell you a product or talks about how to develop your business in an appropriate fashion.
This list could continue, but you really need to focus upon KYB. Know Your Bank. Know that you can trust them and they will deliver what you need. If you do not feel confident that you have this from your bank, then seriously think of changing to a partner that can deliver answers to your needs.