Bank Relationships

Counterparty Risk - A Reality Check

Report date: 
11 May 2023

Commentary

Risk management. Every treasurer includes this as part of their job description, and we are rightly proud of what we do in this area. But, every now and again, we get a reality check. How good are our processes? 

Recent events have provided just such a check, with the failure of Silicon Valley Bank (SVB) in the US, and Credit Suisse. This call was a “lessons learned” session, with an excellent and very detailed discussion on the operational aspects of what people went through, together with some of the broader issues, including the, very human, tendency not to take risks seriously until they materialise.

The call took place before the failure of First Republic Bank, and its acquisition by JPMorgan.

This summary is two pages long – this was a very detailed call, with a lot of practical learning and experience sharing. 

So I will put the bottom line before the long read: the participants who had problems with the collapse of SVB did so because they had delayed integrating recent acquisitions into their normal counterparty risk management processes. With acquisitions, there are good reasons for doing this – but also risks. Others felt management was losing sight of these issues – so it was a useful wake-up call. All participants were grateful to their centralised processes, which meant they could get the information on the exposure quickly, even if this required working with other, centralised, functions. All participants are moving away from using smaller regional or local banks, wherever possible.

It can be hard to justify having a proper and rigorous counterparty risk management process, especially when it has been a few years since the last significant bank failure. This was an important wake-up call. Fortunately, it came at no cost.

Operational issues:

  • Generally, SVB created more anxiety, as the failure became apparent on a Friday, and the intervention of the US federal authorities only became certain over the weekend.
  • Everybody scrambled to understand what payments were going into SVB, so they could be put on hold. The concern was that, if you pay employees or suppliers by making a transfer into an account with a failed bank, they may not be able to access the cash. This concern was
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Banking & Treasury in Saudi Arabia

Report date: 
17 Apr 2023

Commentary

Saudi Arabia occupies a pivotal, and highly unusual, place in global politics and the world economy. As the world’s largest exporter of oil, and the holder of the second largest reserves of oil and gas, it is an essential part of the global economy – and has traditionally been relatively aligned with western and capitalistic countries. At the same time, it is a profoundly religious absolute monarchy, which practices a particularly conservative brand of Islam. This has always placed limits on its co-operation with western countries – limits which are being tested even more than usual in the current environment.

The current situation is particularly complex, as was clear in the call. Saudi Arabia has always imposed severe restrictions on foreign companies and banks, requiring local partners, and imposing local signatories and approvers for most, if not all, transactions. Limitations on where foreigners could live, and what they could do, have meant that many expatriate employees preferred to live with their families in Dubai, and commute to Saudi for the work week. However, the country has recently launched “Vision 2030”, which aims to open up the country and prepare it for a post oil future. This ranges from promoting tourism, allowing women to drive cars, and potentially allowing alcohol sales in specific places, to mega projects such as building a new city in the desert. It also includes pushing MNCs to transfer their regional headquarters to the kingdom. At the same time, foreign ownership is now allowed, either using a Saudi sponsor (with fees), or by paying 20% taxes. 

These developments are viewed positively by the participants – though several cautioned that there are many conflicting undercurrents in Saudi society, and the situation can always change at short notice. In all cases, Saudi Arabia is a large, and profitable, market, to which all our participants are fully committed, irrespective of the operational challenges.

Treasury practicalities:

  • Nearly all participants sell into Saudi from an offshore location, usually in USD. The currency is pegged to the USD, and there are no exchange controls, so things generally work well.
  • Several participants have opened local branches or subsidiaries, either to provide services or to act as sales offices, or technical offices to manage regulatory issues.
  • To participate in the mega projects being run by the government, it is a requirement to transfer any regional headquarters operation to the kingdom. There is direct competition with other countries in the region for this, particularly the UAE.
  • Saudi regulations state that the bank signatories and transactions mus
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Treasury & FX in Bangladesh, Pakistan & Sri Lanka

Report date: 
20 Jan 2023

Commentary

Pakistan, Bangladesh, Sri Lanka – three countries with sizeable populations and even bigger economic and social problems. They are difficult places to do business at the best of times – but they have become even more problematic with recent world events, limiting tourism receipts in Sri Lanka and restricting the apparel export business in Bangladesh.

The themes across the three countries were remarkably consistent, though there are variations in the detail:

  • For all our participants, these are important markets, so they are staying there, even though it is very difficult to get currency out. However, one participant is in the process of divesting their entity in Pakistan.
  • FX has always been an issue in these countries, but it has got worse recently. However, the prospect of an IMF package has led to some improvement in Sri Lanka.
  • Officially, none of the countries has strict exchange control regulations, but in practice, they are restricting the outflows of hard currency by a series of administrative measures. Goods imports tend to be prioritised over services, royalties and dividends.
  • In Pakistan, central bank approval is required for all
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FX & Treasury in Turkey

Report date: 
29 Nov 2022

Commentary

Europe meets Asia in Istanbul – and Turkey is very much at the crossroads when it comes to a lot of the cultural, geopolitical and even military issues which are currently roiling the world. Despite all the turmoil, Turkey remains a relatively open and thriving economy, and it is a significant market in its own right for several participants.

Turkey has been struggling for several years with a high inflation rate, and this is causing issues for all the participants. Despite this, business seems to continue and be reasonably healthy for all of them. The high inflation rate causes a series of problems, but all participants are able to fund their businesses and repatriate cash. The challenges:

  • High interest rates, though these have now fallen to a little over 10%
  • Inflation officially at 85% - but unofficial estimates are up to 150%
  • Scarcity of bank funding: given the above, it is not surprising that banks are not willing to lend – especially as the central bank now requires a deposit of 30% of the amount lent, at 0% for the first 30 days.
  • Some participants have moved to cross-border intercompany funding, onshore intercompany loans between entities, and equity, as required.
  • One participant is looking at cross border intercompany funding from a subsidiary in a third country which has excess cash. The documentation is proving very challenging.
  • Accounting: officially, Turkey has hyperinflation (over 100% in the last three years), which means the HQ’s currency has to be used as the functional currency for accounting, under both IFRS and US GAAP.
  • Hedging:
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FX & Treasury in South Korea

Report date: 
25 Nov 2022

Commentary

South Korea is a market which it is notoriously difficult for foreigners to penetrate: this applies as much to banks as it does to industrial companies. The culture is fiercely patriotic, and the vitality of South Korean industry means that most products are available from local companies, who are often world leaders.

The result is a situation where, despite the size of the economy – in 2021, it had the world’s 10th largest GDP, ahead of Brazil and Russia – it tends not to be a major market for most non South Korean MNCs. This was reflected in the call, where the country is complicated, and not a major focus for most participants. The situation is further complicated by language – English language skills can be rare amongst local staff and banks – and by a significant reluctance on the part of staff and customers to work with foreign banks. When you add in a series of specific, and very strong, local customs and processes, such as customers who often insist on making payments in person, you have a challenging situation.

Despite all of this, our participants manage to work successfully. Cross border cash pooling is possible, using the Consolidated Management of Funds (CMF) structure, which has to be approved by the Bank of Korea. The approval process is burdensome and requires a lot of work – and it all has to be done in Korean. But it works. 

Equally, dividends can be paid – but again, there is bureaucracy. Currency trades must be settled onshore, so many people find it easier to use the offshore NDF market, which is fairly liquid. Intercompany netting has to be gross in gross out – and the won can be remitted offshore. Cross border intercompany loans

 

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FX & Treasury in Chile

Report date: 
31 Oct 2022

Commentary

For many years, Chile has been the poster child for Latin America: after a very difficult period in the early 1970s, it has become a haven for economic and political stability, with an economy which works well, few or no exchange controls, and an environment which is more business friendly than virtually any other country in the region.

The scenario has been somewhat tarnished since 2019, with violent public protests against rises in the cost if living, and a contentious referendum on changing the constitution – changes which were rejected by a large majority. However, in fairness, it must be said that the current constitution dates from the rule of General Pinochet, and the reaction of all political parties appears to have been that the proposal was too radical, and needs to be modified to reflect the wishes of the electors.

Against this background, all participants in the call confirmed that Chile is business friendly. For one, it has become a major market, while several others have made significant recent investments and acquisitions there. No participant has any serious doubts about the country or its future, and all view the absence of FX controls as greatly simplifying their lives.

However, all is not roses, mostly due to slow progress in administrative areas:

  • There is a lot of bureaucracy. In particular, FX trades must be reported to the central bank, even though they are all allowed.
  • The country seems to be slower than most in adopting digitalised banking. Wet signatures are required for virtually every payment and transaction, with no exceptions, even during COVID. This adds a layer of cost and inefficiency, which is surprising – Argentina and Brazil score better on this.
  • Most foreign banks seem to have a weak presence. Citi operates through a partnership with a local bank, Banco de Chile. This works quite well, but you have to ask, for example, to get the benefit of group pricing or to access Citi’s banking platforms. These are available through Banco de Chile, but they do not necessarily advertise the fact.
  • Many other foreign banks are present, notably Santander and HSBC. But it does not seem to be a focus market for them. 
  • The regulations are onerous, and
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Regional Bank Relationships in Asia

Report date: 
2 Jun 2022

Commentary

The way treasurers manage banking relations provides a key insight into how they approach their job. This session was no exception – and we had the additional benefit of input from senior banker in Asia and Advisory Board member John Laurens, who shared his view from the other side of the fence.

  • Nearly everyone had the same goal: try to get the most efficient banking structure.
  • This nearly always involves a general preference for dealing with core international relationship banks over having many local relationships
  • However, one participant commented that local banks in Asia often have excellent technology and services – but it is difficult to get HQ to agree to go with them
  • In any case, there are many situations where local banks are still required, to support tax payments or local payment systems. China, India, Korea and Japan were the countries where this was most frequent.
  • In awarding business to banks, most companies tend to give a preference to the institutions who participate in credit facilities. Exceptions were made when justified by a specific service, but this could become an issue when credit needs increased.
  • Several participants have either recently restructured their banking relationships, or are currently doing so. Comments:
    • It is very important to get the local team on board. They will usually accept the outcome and help if they own the decision, and can see clear benefits.
    • The RFP process is useful, but it is important to carefully check the responses. One participant found that banks often tried to sell capabilities they did not yet have – it is important to focus on what they can deliver today. They also found it was beneficial to use...please sign in to continue reading
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Treasury & FX in China

Report date: 
14 Mar 2019

Included in this report: Entrustment pools, cross-border pooling, electronic BADs

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