ETPG Chair & Treasury Blog
European Treasurers' Peer Group is chaired by
Magnus Lind, founder and Managing Partner of
NFS - Experts in Treasury, a global treasury consultancy. He is also part of the
Editorial Board of the Journal of Corporate Treasury Management.
Prior to setting up NFS in 1992, Lind was head of trading and large corporate accounts at Swedbank after being treasurer at ESAB and sales manager and trader at Den Norske Bank. He has a Master of Science degree from Chalmers University of Technology, Sweden.
Below are the latest posts from his
corporate treasury blog, many of them directly related to or derived from these treasury peer groups.
Treasury Leading Group Consolidation
(Wed, 03 Feb 2010, by Magnus Lind)
Generally in cases of group centralizations the treasury is one of the key functions taking a leading role. By getting control of the group’s cash processes treasury is a catalyst for the rest of the centralizing initiative. Most of the strategic treasury initiatives are implemented through technology. Treasury process improvements are therefore putting a focus on the TMS and other treasury applications and how well they are integrated in the group’s operations. Modern treasury solutions provide huge opportunities for optimizing processes, centralizing cash and control, and for reducing working capital and costs. They therefore become very able tools for leading the consolidation of group operations.
Conclusions of this reasoning are firstly that the ability for technical integration of the treasury applications and the scalability of the IT infrastructure is crucial to achieve results. This is also the reason why the Oracle and SAP treasury and cash management modules are gaining attention and increasing the installed base. Secondly group consolidations is an ample opportunity for the treasury to prove value add for the core business organization. The level of decentralization your company has is part of its DNA and consolidations are therefore usually hard to perform. But getting control of the group’s cash is the tool treasury can use. When treasury gains that control the group management has the means of controlling the group. The guy with the wallet decides.
From the treasury blog post
Treasury Leading Group Consolidation.
Increase Transparency of Banks – Best Regulation
(Fri, 08 Jan 2010, by Magnus Lind)
One can question if the root causes of the crisis were lack of regulation and that the OTC derivatives markets were not properly monitored. Surely the explosion of OTC derivative contracts was an effect of the credit expansion started in the early 80-ties rather than the other way round. The main cause behind the large swings is too much debt. We need to keep that in the back of our mind.
I have studied the work by the EU commission on regulation of OTC derivatives. What strikes me is that regulating separate areas independently seems to be easier than putting the new regulatory framework into context. I am particularly struck by the limited perspective of the discussion. It mainly revolves around banks and other financial institutions when it actually affects the whole society. The corporates are only involved in the periphery of the regulatory discussions.
The key, I believe, for sound financial regulation is to increase the transparency of the banks’ financial accounts. For many years the accounts have been impossible to decipher because the regulators have been keen on not forcing banks to disclose information to the market with regards to competition. But the fact is that banks do not compete in the general sense of the word.
Competition means having the risk of going bankrupt because your competitors take your market. No bank risks that. The banks go bankrupt when they take too much risk, have insufficient controls and bad management. I feel compelled to question if the regulators and bank supervisors know what competition really is.
Compare the transparency of corporate accounts with that of financial institutions. Why can corporates have transparent accounts when the banks can’t? Because the banks are more exposed to competition than corporates?
A more holistic perspective on regulation would be to force the banks to become transparent and enable us to understand what risk their business model and balance sheet entails. Force the banks to become as transparent as the corporates so we all can make our analysis. Now the only parties having sufficient information to evaluate a bank’s risk position are the supervisors. And what can they do about a bank taking too much risk? What can they do about systemic risk? Basically nothing.
However if everyone would have sufficient information of each bank’s positions everyone would price the bank’s shares and choose to transact with the bank based on their own judgment. This is how we usually organize society and free markets. Why shall we not do the same in the financial markets?
From the treasury blog post
Increase Transparency of Banks – Best Regulation.
Forecasts Does Not Come Easy
(Mon, 14 Dec 2009, by Magnus Lind)
Pre-crisis corporates produced forecasts and ran the business based on relatively stabile conditions. Markets were expected to follow a trend, many times growth rates of the economy. This is no longer true. The trend is not your friend instead you need to be prepared for the unexpected.
The Corporate Plans for 2010 survey, performed by the European Treasurers’ Peer Group and sponsored by NFS Group, clearly indicated that forecasts do not any longer come easy. This force mitigation through making the cost base and capex programs much more flexible and it raises the question how we shall hedge without reliable forecasts. Anyway hedging of forecasts only postpones the effect of market rate changes. An alternative is to increase the price elasticity transferring the FX effects to the customers and vendors earlier. This would be an effective hedge but require that we adjust our business model. Alternatives are to seize hedging other than for confirmed transactions or hedge unreliable forecasts. But these options raise more questions than answers.
But there is seldom something bad that does not give birth to something good. The crisis has forced corporates being much more agile, fast moving and flexible, not only relying on the trend. This is a very good improvement and it also forces the corporate management to treat financial risks as business risks and adjust the business model to cater for them.
From the treasury blog post
Forecasts Does Not Come Easy.
Factoring May Improve Rating
(Mon, 07 Dec 2009, by Magnus Lind)
Factoring might be a way to improve the rating for sub investment grade corporates. Lately there has been a gradual shift by banks to change how they view factoring, or invoice discounting. Previously they regarded the factor to take control over some of the collateral decreasing the security for the other financiers but lately there has been a shift towards regarding the cash generated through factoring as early payments from the customers. This perspective means that the cash flow is improved and therefore the default risk is reduced. Through the grape vine I hear the CRA (Credit Rating Agencies) might even improve the rating dependent on the terms of the factoring program of course. One critical issue is obviously recourse.
Implemented on a broader scale this would mean that factoring companies could substantially increase the amount of available funding for corporates. This does not happen every day and could be a counter action to manage the negative effects of Basel II.
From the treasury blog post
Factoring May Improve Rating.
Impact of New (and Old) Regulation
(Mon, 30 Nov 2009, by Magnus Lind)
The European Treasurers’ Peer Groups’ discussions with the central banks’ management assist us in understanding how we must adjust for the future.
Here are some clues:
The window for change has disappeared with the improved economy, which opens up for less drama. Rigorous change basically does not make any political sense any longer and probably the far fetching regulation of the non regulated markets will therefore not happen. And I’m not sure that is a bad thing. It might even reduce to only fighting for global taxes on financial transactions and limiting bonus schemes. The former will definitely lead to higher costs of financing for consumers and corporates and I therefore suspect it will not happen. The latter is only populism and has no real impact.
It seems however likely that increased capital requirements will be implemented but slowly and not during present business cycle. We understand that capital requirements will be increased in periods of high economic activity and vice versa. This makes sense and could limit future bubbles.
There is no sign the central banks are paying any attention to the society outside the banking system. This is especially true in Europe where saving the banks means saving society from economic disasters. As us corporates know this is not true. We will unfortunately have to live with a financial regulation with main focus to avoid bank defaults (Basel II). This means that established trends will continue:
Banks continue exiting the market of balance sheet commitments to corporates and focus more on the private market. One of the cornerstones to avoid bank defaults in the Basel framework was making the banks less exposed to corporate risk introducing the credit markets as buffer and high capital requirements on corporate risk. Very little has been learnt from the crisis in this area and therefore the shift to arm’s-length from relationship banking and increased reliance on automated risk management will continue. The only major lessons learnt by central banks from the crisis is that banks and financial institutions will default despite of Basel II. Therefore they have implemented models to avoid another Lehman. That’s a good but not a sufficient improvement.
One area where the central banks do not take any responsibility is improving the global payment system. This could be an area where modern regulation could have provided substantial value for the non financial sector. The central banks expect the “markets” to improve payments infrastructure but it is obvious there are few incentives for the financial industry. Instead governments and central banks should assist by prohibiting float by law and breaching institutions would have to pay a severe “fine” to payer and payee. Then the incentives for change would be there. Actually I would expect that without this legislation payment systems would continue to be dysfunctional for many years to come. This would severely hurt the corporate sector having to continue raising liquidity to provide it to the financial sector, indeed an irrational setup.
From the treasury blog post
Impact of New (and Old) Regulation.