Know your bank to trust your bank

Before the finan­cial cri­sis hit, most com­pa­nies were seek­ing to cre­ate effi­cien­cies in their trea­sury oper­a­tions by select­ing one or two key banks per region for all their trea­sury ser­vices.

An exam­ple was a trea­sur­er at a 2007 con­fer­ence who claimed that by con­sol­i­dat­ing their glob­al bank­ing rela­tion­ships to just one per region, they were sav­ing bil­lions. The sav­ings were not only in the incen­tives offered by the bank to region­alise rela­tion­ships, but also by reduc­ing the num­ber of coun­ter­par­ty banks and oper­a­tions they need­ed to con­nect with. The drum­beat of the trea­sury mar­ket was to reduce com­plex­i­ty, reduce rela­tion­ships and reduce costs.

Then the cri­sis occurred and bank liq­uid­i­ty dis­ap­peared. What fol­lowed was a peri­od of high­ly strained rela­tion­ships between cor­po­rates and banks. Large cor­po­ra­tions fared bet­ter than small to medi­um-sized enter­pris­es, but even the large organ­i­sa­tions changed their tune. From con­sol­i­dat­ing rela­tion­ships, these large enter­pris­es have worked hard to reverse direc­tion and ensure they can hedge their rela­tion­ships. Hence, two banks per region or even per coun­try is becom­ing a far more com­mon mantra.

This is in order to ensure they can gain access to cred­it and exchange ser­vices, trade finance and work­ing cap­i­tal ser­vices with ease. The cost may be high­er, but for many the cer­tain­ty of pro­vi­sion of finance is more impor­tant than costs.

Even more impor­tant is the need for trust.

Banks have a mantra of KYC – Know Your Client – but cor­po­rate trea­sur­ers are turn­ing this around to KYB – Know Your Bank.

The bank KYC is all about the avoid­ance of penal­ties from reg­u­la­tors by deal­ing with mon­ey laun­der­ers or ter­ror­ists. The bank has to prove they inves­ti­gat­ed their client enough to ensure they real­ly are who they say they are, and that all is above board in terms of deal­ing with cred­i­ble, wor­thy and hon­est cus­tomers.

Rebuild­ing trust and rela­tion­ships with banks is now the key to future ratio­nal­i­sa­tion of trea­sury oper­a­tions

The cor­po­rate KYB involves trea­sury oper­a­tions inves­ti­gat­ing their bank providers, to make sure they can be trust­ed in good times and bad. When the cri­sis hit the glob­al mar­kets, access to loans and cred­it dis­ap­peared for most. In some cas­es, banks went to extremes and were even accused of forc­ing some com­pa­nies into bank­rupt­cy by shut­ting down access to short-term financ­ing, caus­ing the firms to be unable to acquire inven­to­ry, while devalu­ing com­pa­ny assets and call­ing in long-term loans.

Such actions destroyed any trust in such banks, and rebuild­ing trust and rela­tion­ships is now the key to future ratio­nal­i­sa­tion of trea­sury oper­a­tions.

So what does a com­pa­ny real­ly want from their bank?

These things are sum­marised by the Asso­ci­a­tion of Cor­po­rate Trea­sur­ers as being fair, open and trans­par­ent; to pro­vide clear and con­cise com­mu­ni­ca­tions in plain Eng­lish; to pro­vide choice and rec­om­mend the right prod­ucts for their busi­ness needs; to be proac­tive and rel­e­vant; and to show respect and clear­ly demon­strate the bank has researched the com­pa­ny and its require­ments.

Inter­est­ing­ly, the key here is to be a trust­ed advis­er – one who puts the customer’s inter­ests first. This is some­thing that again has bro­ken down when you hear of Gold­man Sachs refer­ring to cus­tomers as “mup­pets” or that high-fre­quen­cy traders reg­u­lar­ly use “flash trad­ing” to game the mar­kets.

The for­mer ref­er­ence comes from a let­ter by a 12-year vet­er­an of Gold­man Sachs Greg Smith, who stat­ed in his res­ig­na­tion let­ter that, “over the last 12 months, I have seen five dif­fer­ent man­ag­ing direc­tors refer to their own clients as mup­pets over inter­nal e‑mail”.

The lat­ter is the focus of Michael Lewis’s new book Flash Boys, which has picked up on the theme known in the finan­cial mar­kets for some time that bro­kers act­ing on behalf of clients can eas­i­ly increase their returns by buy­ing and sell­ing shares sec­onds before their clients buy and sell the same shares through their com­put­er sys­tems. In so doing, the bro­ker makes a few cents on each trade, which may sound like an irrel­e­vance, but when you’re talk­ing of mil­lions of trades per day, it soon amounts to a decent dai­ly prof­it.

These are areas being inves­ti­gat­ed by reg­u­la­tors, but the due dili­gence of a trea­sur­er to inves­ti­gate and ensure that their bank can first be trust­ed and sec­ond be trust­ed for advice has nev­er been greater.

So what should a trea­sur­er do and, more impor­tant­ly, what should they ask of their bank?

Most trea­sur­ers just want some basic ser­vices. They want banks to show them how to sweat their assets; enhance and unlock share­hold­er val­ue; improve their work­ing cap­i­tal; and ease the sup­ply chain. What they tend to get is prod­uct sales-focused bank-rela­tion­ship man­agers, who con­cen­trate on the bank’s needs rather than the customer’s.

I would sug­gest any trea­sur­er should ask their bank the fol­low­ing ques­tions and see if they get answers:

• What does my com­pa­ny do? See if your bank under­stands your busi­ness.

• Which are the key mar­kets we oper­ate in? See if the bank knows your main coun­tries or areas of oper­a­tion.

• What is the most effi­cient way to deal in those mar­kets? See if the bank can tell you how to get the most effi­cien­cy in cur­ren­cy exchange or local ser­vices in those coun­tries and areas of oper­a­tion.

• What can you do for me? See if the bank tries to sell you a prod­uct or talks about how to devel­op your busi­ness in an appro­pri­ate fash­ion.

This list could con­tin­ue, but you real­ly need to focus upon KYB. Know Your Bank. Know that you can trust them and they will deliv­er what you need. If you do not feel con­fi­dent that you have this from your bank, then seri­ous­ly think of chang­ing to a part­ner that can deliv­er answers to your needs.