Geopolitics and Contingency Bank Relationships in Corporate Treasury

Commentary

How to run an efficient global treasury and cash management system, while keeping risk under control?

This dilemma is becoming increasingly acute. In the past, treasurers focused mainly on counterparty risk – the danger that a bank might fail, or decide to exit a specific market. This risk is still present, but today the real concern is geopolitics. One month before this call, we held a session on banking in the Gulf and the Middle East, where the peers had been happy with progress in cash management, banking systems and the economy. By the time this call took place, they were worrying about the physical safety of their teams in the region, and the very uncertain outlook.

As one peer put it: by centralising cash management and reducing banking relations, we have moved the risk from the individual banks to the system.

Traditionally, risk is managed by building redundancy. If you sell healthcare products into Russia or Iran, you are usually exempted from trade sanctions. But your core relationship international banks are not – so it is prudent to set up accounts with banks you can fall back on if needed.

This makes sense, but it brings challenges. In addition to increasing KYC requirements, the extra accounts often require local teams, the banks are often difficult to integrate into global cash pooling systems, and the global banking spend is further diluted, making it even harder to manage wallet share amongst the banks.

How do treasurers approach this challenge?

• You cannot eliminate all risk. At some point, we need to be prepared to react, though a disaster recovery plan is always helpful. For example, it is difficult to plan for the potential cessation of business with China, but splitting business structures can help.
• Generally, treasurers were not concerned about the risk of a major international bank, such as Citi, JPMorgan or HSBC going under. Peers rely on “too big to fail”.
• Backup is often via relationships with local banks. This usually means leaving the local teams to manage them, complicates cash management, and generates additional supervisory workload. But most local banks today provide balance reporting by SWIFT, and, up to a point, the additional cost is accepted – though it has to be managed within existing budgets.
• Apart from the KYC issues, setting up new bank accounts creates a risk, as connectivity needs to be established and customers have to be asked to change where they pay to.
• This all means setting up new bank accounts takes time, so do it ahead of any crisis.
• Increasing the number of banking relations further complicates managing wallet share: the new banks look for additional fee business, and the international banks expect to be rewarded for providing support in difficult jurisdictions. Local banks often have limited interest in business with large MNCs: they often have to be well rewarded.
• Sanctions are a real problem. Companies with exemptions, such as those in the pharmaceutical industry, need to find banks still providing services in sanctioned countries – this can be a moving target. 
• Even when sanctions are lifted, as recently with Syria, international banks often hesitate to return, and the financial infrastructure may be damaged. It can be difficult to explain this to the business. 
• Some peers leave cash balances with local banks, to be sure of making payments. Good news: these banks often pay better interest rates.
• An additional reason for having relationships with local banks is that the international ones often exit countries in times of stress, though they usually provide notice.
• Of course, standard risk management techniques, such as managing counterparty limits, still apply. Some peers are implementing multibanking solutions, to make it easier to insert new banks on a “plug and play” basis.
• As if this was not enough, new issues are emerging, such as cybersecurity. 

Bottom line: It is not possible to protect a company against all imaginable risks, such as armed hostilities with China or the failure of a bank like Citi. But peers are increasingly looking at spreading risk and implementing contingency measures, even if they reduce efficiency and increase cost.

Fortunately, new technologies are making it easier to manage additional local banking partners remotely, and supervise local teams from a distance. But treasurers still need to be prepared to handle emergency situations which seemed inconceivable a few short years ago. 

Needless to say, the relentless pursuit of efficiency and reduced cost is not going away…..