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New Normal: Why Treasurers Must Respond to Regulatory Change

  • By Jeremy Taylor
  • Published: 7/6/2015
The continuous onslaught of new regulation has become a natural part of the business environment in which many financial institutions are now forced to operate. Dealing with a constant stream of regulation has become the new normal for many banks, but the ripples of regulation are far reaching, with corporate treasurers being just one group who have to adapt to this new world of continuous regulatory change.

With the volume of regulation showing no signs of decreasing, GFT conducted a global research project to establish the attitude of the global investment banking community to this new environment. The research surveyed 66 organizations, including global and domestic investment banks and CCPs across the UK, Europe, North America and Asia.

The survey findings reveal that banks believe they now have the opportunity to make better business decisions as a result of regulation, but still see the challenges as essentially an exercise in compliance. Only 48 percent claim they are acting upon their findings to help improve their business processes.
More troubling for corporate treasurers, respondents admit that their banks pursue manual workarounds to meet regulatory requirements. This overreliance on tactical workarounds may tick the boxes for compliance but it inevitably leads to a legacy of technical debt which will require further remediation at a later date.

The impact on treasury

Corporate treasurers will be one of the groups affected by this client relationship review, but it should be remembered that this review is a two-way process. Corporate treasurers will need to continue monitoring regulatory developments and reevaluate their own business relationships with banks. What is clear is that relationships between corporate treasurers and banks have now fundamentally changed as a consequence of regulation.

Regulation will produce a number of short and long-term effects for corporate treasurers to deal with. There are four main areas corporates should pay attention to in terms of how their relationships with banks are affected, including: asset and liability management, liquidity, collateral costs, and the raising of capital.

For banks, regulation inevitably increases the cost of doing business, and corporate treasurers may find accessing finance from banks more difficult than ever in this new environment. The impact of Basel III on capital requirements, liquidity and leverage ratios means banks will begin to reassess their relationships with corporate clients, with the aim of ensuring that the returns they make from clients correlate with their own targets. In this new normal world of higher capital ratios, banks will be more discerning in who they lend to; how they allocate capital and the risks associated will be of increasing importance.

Corporate treasurers should be aware of this, but they also need to understand the pressures and strains that banks are under. With many choosing tactical solutions to meet regulatory requirements, this only increases their technical debt and process costs. This rise in costs will inevitably be passed on to corporate treasurers.

The size and scale of liquidity provided by banks is at a lower level than previously seen, providing a natural opportunity for alternatives, such as the growing shadow banking sector. Given this, corporate treasurers will need to be open to the consideration of other such providers of liquidity, with additional source of funding creating more choice. However, as shadow banking involves entities and activities outside of the regular banking system, there is an inherent risk associated with choosing this option. In these circumstances, it is vital that corporate treasurers conduct due diligence when choosing institutions in the shadow banking sector to supply them with liquidity and other services.

Corporate treasurers may also need to look for alternative cash management services, since deposits held as liabilities on bank balance sheets are also likely to come under increasing scrutiny due to tighter balance sheet leverage ratio limits.

The constant regulatory challenge has, and will, continue to transform the roles and responsibilities of corporate treasury teams. Monitoring regulatory risk will remain a key requirement and treasury teams must adopt an agile approach in their partnerships with banks. This will include reviewing their relationships, and identifying which services will continue to be provided by banks, and those that will be provided by new and alternative financial institutions.

Jeremy Taylor is Head of Business Consulting (UK) for GFT.

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