Following the collapse of the sub-prime mortgage market in 2007, various government authorities and corporate organisations across Europe have reported losses from investment in derivatives products as a result of credit markets unravelling.
But haven’t we been somewhere similar before?
In the late 1980s, the London Borough of Hammersmith and Fulham almost cost taxpayers tens of millions of pounds by wading up to their neck in the interest rate swaps market and similarly, in the mid-nineties, California’s Orange County lost $1.5 billion
of taxpayers’ money in leveraged interest rate deals.
The introduction of Sarbanes Oxley has effectively made the board of corporate organisations increasingly accountable for financial practices that carried a lot of risk – if a Treasurer doesn’t understand the instrument they’re investing in then they shouldn’t
be investing in it. Trading in volatile, opaque financial instruments needs to be increasingly open, transparent, liquid and auditable.
Corporates will continually need to generate re-investment to fund new business development, acquisition and research, and underpinning all of these efforts is growing operational costs and investment that needs to be made in supporting the longer term vision
of the business.
Banks also then have a responsibility to the borrower in making sure that their selling and trading practices are as transparent as possible as a corporate organisation’s operational risk can be massively increased through poorly executed and complex trading
In the derivatives and over-the-counter (OTC) markets corporates have relied on banks to ‘teach’ them about investment decisions to give them access to credit they didn’t already have. Corporates now however are demanding increased transparency in their
relationships with banks and the instruments they are offering. When this transparency is combined with strong treasury technology, corporates are able to dissect banks’ derivative quotations – and this can lead to tangible price sharpening. In an actual
example, a corporate needed to unwind a cross-currency swap position that had transformed into an exposure when the business project it was supposed to hedge was suddenly cancelled. Using their TMS, the corporate was able to analyse banks’ quotations for
unwinding the position, and was able to demand tighter pricing that in fact resulted in a saving of about $½ million in the course of an afternoon’s dealing.
This drive towards a need for transparency is trickling through into other areas of the bank-to-corporate relationship also, especially on the commercial banking side.
As the credit crunch continues demand for accounts receivable financing is increasing. Large companies with excellent credit histories and small companies with no credit histories are turning to accounts receivable financing to keep their companies running
with the working capital they need, after feeling the strain of recent banking restrictive lending practices.
Treasurers are also calling for stricter guidelines around pricing transparency and consistency in service level costs and bank account management fees. Competition for banking business and pressure for standardisation has been the catalyst for a number
of initiatives to enhance billing transparency, formats and systems.
What corporate organisations need from their banking relationships is greater transparency across the board. Traditionally banks have been used to being in the driving seat; advising their clients what to do and assuming intelligence around complex financial
instruments. In the current climate competition for banking business from corporates is fierce and maybe it’s time for banks to start listening to what their clients want.