Are you hamstrung by your company’s treasury policy?

I know of many companies that are carrying huge opportunity costs for surplus operating cash because their treasury policies are over simplistic. The treasurer is forced to take a very narrow view when dealing with cash surpluses.

Treasury policies have taken on a whole new significance since the onset of the current financial crisis. I have spoken to countless Treasurers who are finding that the Treasury Policy actually prohibits commercially sensible decisions particularly around bank counterparty credit and liquidity risk.

A typical treasury policy I see will set out how credit risk should be managed in a very black and white manner. It will probably specify a minimum credit rating requirement for all bank counterparties.  It will typically limit the aggregate amount and duration of exposure to any one bank counterparty.

The problem is that in the current market this leaves treasurers with limited choice of counterparties. Worse still if your bank knows this they will take advantage and offer you miserable deposit interest rates.

A satisfactory bank counterparty credit and liquidity risk is essential. However for corporate deposits it comes at a price. That price can be measured very accurately in the form of the interest rate.

Some banks will tell you that they don’t need your deposits and will bleat about their strong credit rating. Their near zero interest (or maybe negative interest rate in some cases!) return on deposits is a boast about how strong they are.

We all know that despite their noises banks need deposits. Credit ratings are only indicative and in many cases can be a flawed measure of financial strength. They must be taken with a pinch of salt. In almost every case I have encountered over the past few years clients’ deposit s are worth far more to the bank than their pricing suggests. There is plenty of room for negotiation.

If you look quickly at the balance sheet of your banks you will confirm that their business is dependent on customers’ deposits. You should also be able to determine how hungry they are for deposits by researching their marginal cost of funds (a good market determinant) from a study of market data.

You should also check out their pricing for retail customers. The retail arm of banks has a different approach to pricing deposits in part because those deposits are perceived to be ‘stickier’. This information will help your price negotiations.

A good treasury policy puts Treasurers in more control over decision making for operating cash surpluses. The treasury policy should provide a matrix that sets out clear direction and inter relate limits based on risk, liquidity AND PRICE.

This strengthens the role of the Treasurer and puts them in a more pivotal role in the company. My company has developed scorecards for treasury with key performance indicators that allow treasurers to demonstrate tangibly their contribution to the company. Our analytics deliver KPI’s that allow Treasurers to easily measure and track the return on funds, liquidity and risk.

Is your treasury policy for cash deposits dynamic?

Is it reviewed regularly?

Does it take account of all of the following?

  1. Bank counterparties‘ market-based ratings
  2. Bank counterparties Tier 1 capital level
  3. Bank counterparties credit default swap rates
  4. Bank counterparties‘ systemic importance to the financial systems of their home countries
  5. Liquidity
  6. PRICE – deposit interest rates

If you are a treasurer reading this I would really appreciate your views and what kind of changes you have suggested to make your treasury policy more robust.