BANKING ON IT

RESHAPING BANKS RELATIONSHIPS

WITH CORPORATE TREASURY
PAGE 2
BANKS TWEAK
PRODUCTS WITH
BASEL III IN MIND
PAGE 12
SPECIAL REPORT: BANK RELATIONSHIPS & BORROWING
SEPTEMBER 2014 SPECIAL REPORT treasuryandrisk.com
Sponsored by:
Bank of America Merrill Lynch,
e5 Solutions Group & QBE
TR_SR_Sept14.indd 1 9/16/14 12:06 PM
2 TREASURY & RISK SEPTEMBER 2014 SPECIAL REPORT treasuryandrisk.com
N
o relationships are more important to corporate treasurers than their
relationships with the banks that provide them with credit. But companies
ties to their banking partners could be strained in coming years as large banks
adjust to the new capital requirements set forth by Basel III. At the same time,
companies growing use of SWIFT and other services to link to their banks may make it
easier for corporate treasuries to shufe their banking relationships.
The implementation of Basel III capital
requirements is expected to push the cost of
credit higher and make banks a little choosier
about which companies they ofer credit.
Meanwhile, Basel IIIs liquidity coverage
ratio, which evaluates a banks ability to fund
itself over a 30-day period of nancial stress,
puts a premium on companies operational
balancessuch as those associated with
payroll or accounts payableon the grounds
that such deposits will be stickier. Short-term
deposits that are not linked to operations will
become less attractive to banks, since banks
will be required to hold more reserves against
those deposits. And Basel IIIs leverage ratio
could limit the total amount of lending banks
are able to do.
Diferent countries will implement the
Basel III capital requirements in diferent
timeframes; in the United States, the rules
start to kick in at the beginning of next year.
Banking On It
TR_SR_Sept14.indd 2 9/16/14 12:06 PM
treasuryandrisk.com SEPTEMBER 2014 SPECIAL REPORT TREASURY & RISK 3
Mark Webster, a partner at consulting rm
Treasury Alliance Group, expects the environ-
ment created by the new capital requirements
to focus treasurers attention on credit. As
a corporate, I need to be very sure where Im
getting my funding, he said. And I need
to make sure credit will be available when I
need it, because theres going to be a reduced
supply of it as these regulations kick in and
borrowing costs will go up.
So far, though, the cost of credit hasnt
budged. If you look at any data in the syn-
dicated loan market, pricing has tightened
and capacity has grown, said Anne Clarke
Wolf, head of global corporate banking at
Bank of America Merrill Lynch. It feels like
many banks around the world are focused on
deploying excess liquidity more so than con-
cerned about the implication from a capital
charge perspective.
Typically in the loan market, it takes a
very high-prole transaction to show a fun-
damental re-pricing or a philosophical shift,
Wolf added.
The new capital requirements will afect
diferent types of deposits and bank oferings
diferently.
Any facility that represents a liquidity
backstop to some other type of vehicle that
could potentially be shut of in time of crisis
will be more impacted than facilities for more
operational or term-out purposes, said Dub
Newman, head of North America Global
Transaction Services at Bank of America Mer-
rill Lynch.
(continued on page 6)
The stricter capital requirements soon to hit banks are
likely to raise the cost of credit. They might also strain
companies relationships with their banks.
BY SUSAN KELLY
Typically in the loan market, it takes
a very high-prole transaction to
show a fundamental re-pricing
or a philosophical shift.
ANNE CLARKE WOLFF, BANK OF AMERICA MERRILL LYNCH
TR_SR_Sept14.indd 3 9/16/14 12:06 PM
Opportunity Knocks
on the Future of ISO 20022
Tom Durkin, Managing Director,
Global Head of Integrated Channels, Bank of America Merrill Lynch
SPONSORED STATEMENT
Expanding the functionality
of ISO 20022
In 2009, ISO 20022 restructured and
expanded the message sets for pay-
ments initiation, payments clearing and
settlement, exceptions and investiga-
tions and numerous other areas, based
on experience in actual implementa-
tion and usage experience. The results
have been very successful as ongoing
versions of the message sets have
been updated and built on that base.
However, there remain many potential
applications for ISO 20022, some of
which could help corporates to achieve
long-cherished goals.
Currently, message development for
specic business needs are underway
in the payments domain in four impor-
tant areas: remittance advice; real-time
payments; account switching; and
invoice tax reporting.
To accommodate the growing need for
robust remittance information associ-
ated with a payment, two stand-alone
remittance advice messages were
published in April 2014. They allow for
remittance advice information to be
contained in the messages outside the
payment transaction information. The
dened ows allow for these standalone
messages to be exchanged outside of
the typical nancial transaction process,
such as the buying or selling organiza-
tions exchanging the messages directly
or, alternatively, banks may provide
value-added services by sending the
remittance advice message to corpo-
rates. Two types of messages are avail-
able: The rst carries the full remittance
information; the second carries how
or where information about the remit-
tance is delivered, such as a URL where
further information can be found on a
portal or that it has been sent by email,
fax or post, for example.
Customer demand and regulatory
pressure in the U.K. is also driving the
need for message sets associated with
the processing of real-time payments
and account switching (typically for
consumer bank customers). Following
completion of the pilot program, can-
didate message sets will be submitted
to ISO 20022 for approval before nal
messages are published.
Functionality, such as account switch-
ing, has long been a problem for corpo-
rates and banks alike. The creation of
a message set may help a banks client
move to a new bank in a timely man-
ner, while maintaining existing banking
arrangements such as direct debits and
their associated mandates, shows the
exibility of ISO20022 in addressing
common payment-related problems. Ad-
ditionally, it ofers further evidence that
the standard is capable of meeting the
many challenges that face the nancial
services industry as well as corporates.
A third pilot is underway for a mes-
sage set for invoice tax reporting,
which was submitted by the Finnish
ISO 20022 user community. This group
wants greater harmonization of how
value added tax (VAT) information is
reported by corporates and banks to
various government agencies. Cur-
rently, reporting requirements for VAT
vary signicantly, even within a single
country. The hope is that by standard-
izing the process considerable efcien-
cies can be achieved.
Future opportunities for ISO 20022
While the three pilots currently under-
way will ultimately expand the func-
tionality of ISO 20022 in very important
ways, there are many other challenges
faced by both banks and corporates
where ISO 20022 could play a crucial
role. For example, many companies may
benet from a message set to support
Payee Positive Pay, both for check and
ACH. Payee Positive Pay is an anti-fraud
measure that sends data to a bank
when payments are issued. It helps to
ensure that payments can be validated
against details such as payee name,
amount and date. If there is a discrep-
ancy the company can decide not to
pay. While some banks have retro-engi-
neered solutions for Payee Positive Pay
using existing message sets, these are
not a clean t and are sub-optimal.
Other opportunities for ISO 20022
include card transactions, which could
be included in payment transaction
messages and relevant details reported
for cash management activities. While
Currently, message development for specic business
needs are underway in the payments domain in four
important areas: remittance advice; real-time payments;
account switching; and invoice tax reporting.
TR_SR_Sept14.indd 4 9/16/14 12:06 PM
some work has been done on develop-
ing data content for card transactions,
greater clarity is required on deni-
tions. Corporates would like the data
elements in messages that support
purchasing cards and virtual cards to
be more robust so that they could be
condent they ofer the same function-
ality of messages associated with the
movements of funds from an account.
Another potential application for ISO
20022 is related to the remittance in-
formation for royalty payments, where
volumes have increased markedly in
recent years. Royalty payments difer
from other remittance-type payments
due to the specic reporting details
required in a message that are difer-
ent from invoice information typically
associated with a vendor payment, such
as explaining the source of the royalty.
The healthcare industry may also see
benets from an ISO 20022 message set
associated with explanation of benet
claims. This could provide the appropri-
ate level of information to make reconcil-
iation easier for insurance and health-
care companies and potential alternate
delivery of information to consumers.
Continuing growth
ISO 20022 must constantly innovate
and expand if it is to continue to pros-
per and just not maintain the status
quo. Growing corporate involvement
is an important part of ISO 20022s fu-
ture. Similarly, the growing dominance
of ISO 20022 in market infrastructure
is signicant. Where new clearing sys-
tems are created, or existing systems
revamped, ISO 20022 is now invariably
the standard selected.
One way a corporate or vendor may
become involved is through their par-
ticipation in the Common Global Imple-
mentation Market Practice (CGI-MP)
initiative, which denes how messages
can be used by banks, corporates and
vendors. This harmonization direction
has been one of the most important de-
velopments in the business utilization
of the ISO 20022 messages in recent
years. While ISO 20022 is a global
message standard, it does not specify
how a specic code value should be
used, or how information elds should
be populated. Consequently, diferent
banks have implemented ISO 20022 in
diferent ways, making it more challeng-
ing for corporates who manage multiple
banking relationships to implement.
CGI-MP harmonizes how banks sup-
port ISO 20022 in various business
areas, and acts as a guide so that mes-
sages sent to one bank can be easily
processed by another. For corporates,
that means a minimal amount of work
is required to implement ISO 20022,
achieving the interoperability across
bank relationships, and providing a
broader usage on a day-to-day basis.
Rather than the corporate having to
change how a data eld is used with
each bank, CGI-MP denes guidelines
minimizing the need for adjustments
by the corporate, such as populating a
common code to identify a non-urgent
or urgent payment type.
Other opportunities for ISO 20022
include card transactions, which could
be included in payment transaction
messages and relevant details reported
for cash management activities.
However, education highlighting
existing applications and benets is
equally important to the future of ISO
20022, especially among corporates.
For example, many corporates may not
fully understand how to use a remit-
tance eld correctly or appreciate the
full functionality of some message sets.
The Association for Financial Profes-
sionals is reaching out to participants
of ISO 20022 committees and other
organizations to help make certain
that educational opportunities exist
for practitioners to understand the full
capabilities of ISO 20022 and the future
opportunities that could be realized.
For the nancial community, one
development that could increase
corporate condence in ISO 20022 is a
certication process. This would enable
banks, other nancial institutions, cor-
porations and vendors to demonstrate
that they have a proven track record of
supporting and promoting ISO 20022.
Look for Bank of America Merrill
Lynch, a steadfast supporter of global
standards, and leader in the ISO 20022
community, to search for ways to
increase the use of this standard and
remain on top of all new developments.
Tom Durkin
Managing Director,
Global Head of Integrated Channels
Bank of America Merrill Lynch
Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by
banking afliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking afliates of Bank of
America Corporation (Investment Banking Afliates), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and
members of SIPC, and, in other jurisdictions, by locally registered entities. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC
and are members of the NFA. Investment products ofered by Investment Banking Afliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed. 2014 Bank of America Corporation
TR_SR_Sept14.indd 5 9/16/14 12:06 PM
Newman said the impact of the new
regulations will become clear by the middle
of next year.
An increase in credit costs could poten-
tially discourage corporate treasurers from
negotiating as large a credit facility as pos-
sible, Webster said. Historically, a treasurer
who estimated that her company needed a $5
million operating line from a bank, but knew
the companys nancial strength and credit
ratings were strong enough to qualify for $10
million, tended to ask for the larger facility.
The commitment fee on the entire facility was
minimal, and the company would pay interest
only on the part of the facility it drew down.
Now that banks will be required to count
the entire committed line toward reserve
requirements, treasurers should rethink that
approach, he said.
Were telling corporates, Take a look at
what you really need and be more reasonable
about what youre asking for, Webster said.
The banks dont want to tie up a lot of extra
funds that are never going to be used; theyre
going to be kicking up their fees on those.
But Wolf said that while the changes may
suggest its time for treasurers to reduce the size
of the credit line they request, the dynamic re-
mains that its fundamentally cheap insurance.
It would be the exception, not the norm,
that we see people reduce the size of facili-
ties, she said.
Dave Robertson, a partner at consultancy
Treasury Strategies, predicted that going for-
ward, banks will ofer more of their custom-
ers advised, or uncommitted, lines of credit
rather than committed lines. With an advised
line, the bank is saying, If everything looks
good, well lend you this money, Robertson
said. Thats diferent from a committed line.
Those who dont want to pay for it arent go-
ing to get a committed line. Those who want
it are going to have to pay for it.
A Collateralized World
Matthew Dunn, a director in the treasury
risk management practice at Deloitte, said
A
s banks prepare for stricter capital requirements that could
dampen their interest in extending credit, it behooves
corporate treasuries to get a better handle on their
relationships with their banks. Some treasuries are turning to risk-
adjusted return on capital, or RAROC, models to assess the return
their banks are realizing on their business.
Weve helped our corporate clients develop their own RAROC
models, said Mark Webster, at partner at consultancy Treasury
Alliance Group. RAROC models measure the return on an investment
or business relationship while taking into account the amount of risk
involved.
Ten years ago, the companies that were at the leading edge of this
were just taking a look at revenue, Webster said. Now some of them
are beginning to move to using an actual RAROC model to say, What
are the banks getting from us?
When a company obtains a credit line from a group of banks, each
of the banks hopes to win cash management business or other work
from the company. When bankers visit corporate clients, they often
tell treasurers the bank isnt earning enough, and they ask for more
of the companys business, Webster said. This is where a companys
RAROC calculations come in handy.
What were nding as a best practice for corporate treasurers is to
track the relationship and be able to say to the banker, Gee, youre
one of ve banks in our credit group and youre getting 25% of our
business, he said.
If the bank disagrees with the companys estimate, the company
can ask the bank for more information. Using RAROC calculations
gives treasuries a wonderful tool to have a discussion with the bank
and try to improve transparency, Webster said.
Its expensive for the corporate to move bank accounts, and its
expensive for banks to lose the relationship, he added. They want
to keep the relationship. The question is: How do they maximize it
for both sides?
Laurens Tijdhof, a partner at European consulting company
Zanders Treasury & Finance Solutions, talks about wallet-adjusted
return on capital, or WAROC, a RAROC calculation that takes into
account the portion of the companys credit line that each bank
provides.
A WAROC calculation isnt an exact science, Tijdhof said,
because companies have to estimate some numbers. Its very
difcult to make an exact calculation like the bank does, he said.
But, he added, even based on these assumptions, you get quite
good insight on whether your bank makes money on you or not.
It really supports the decision-making for making the right
balance between a corporate and a bank, he added.
A recent article by Tijdhof and a colleague, Pieter Sermeus, argued
that companies which use WAROC to assess their banks should
also take into account factors that cant be included in the WAROC
calculation, such as insights that a bank provides on the companys
business or specic services it ofers that the company needs.
Tijdhof also pointed to the risk management aspect of monitoring,
given the likelihood the new capital requirements will cause banks to
be more selective about the companies to which they extend credit.
If a bank is losing money on a corporate client, they will probably
step out and withdraw the credit, he said. Its in the interest of the
corporate to make sure the relationship works for both.
Getting a Handle on Banking Relationships
(continued from page 3)
6 TREASURY & RISK SEPTEMBER 2014 SPECIAL REPORT treasuryandrisk.com
TR_SR_Sept14.indd 6 9/16/14 12:06 PM
that to some extent the impact of new capital
requirements will depend on the corporate
customers industry. For example, he said,
hedge funds that borrow short-term from
banks are likely to see prices rise because the
banks are going to have to hold high-quality
liquid assets against those loans.
Banks may also respond to the new capital
requirements by asking corporate customers
for collateral as part of more transactions, he
said.
We are going into what they refer to as
a collateralized world, Dunn said. If Im
going to do a transaction with you, I want
some collateral in return. Its not only driven
by regulation, its driven by the risk manage-
ment issue.
Dunn cited the example of wire transfers
that banks execute for corporate customers.
If a bank looks at how many high-value pay-
ments it makes a day and runs some type of
stress scenario, it would be required to hold
some type of security against that, he said.
If it turns out the bank needs to hold a certain
number of Treasury bonds against those
payments, holding Treasury bonds is going
to cost money, Dunn said. So the bank can
either ask clients for bonds as collateral or
add that to the cost.
Banks are dealing not only with the advent
of stricter reserve requirements, but also with
the growing cost of complying with an array
of new regulations.
The one thing that is really starting to
stretch banks is the regulatory compliance
costs, Dunn said. How do they pass those
costs on to their clients? A lot of this regula-
tion hasnt become efective yet. Over the next
three years, as that cost starts bleeding to
the bottom line, how do they recoup that or
charge their client base more money?
Webster said compliance costs give banks
a reason to value larger corporate customers
more than smaller ones. Lets say Ive got
a relationship with Company A thats worth
$100,000 in business a year and a relationship
with Company B thats worth $10,000 a year,
he said. My regulatory costs as a bank to deal
with A and B are going to be roughly the same.
Id much rather get $100,000 than $10,000.
Banks are looking toward moving to
larger relationships, he added. And in some
cases theyre going to Company B and saying,
Were going to shut down this relationship;
were not making enough money.
Webster argued, though, that the new
capital requirements favored treatment for
operational cash could end up forging tighter
relationships between banks and corporate
treasury functions because banks will need
to make sure they are familiar enough with a
companys business and cash ows to back
up their classication of company deposits
as operational cash. The relationship need
goes up even more, Webster said.
Craig Jefery, managing partner at consul-
tancy Strategic Treasurer in Atlanta, said that
while the nancial crisis put banks in the
drivers seat, the balance of power has since
shifted back toward corporates.
When the nancial crisis hit, it went very
rapidly from a buyers market to a sellers
market, he said. The power was all on the
bankers side.
Over the years, its moved back toward a
buyers market again, Jefery continued. Its
not as thinly priced as it was pre-nancial
crisis, but the pendulum has swung heavily
and consistently onto the buyers side. There
has been a lot more capital that needs to be
deployed, and a lot of companies tend to be
cash-rich.
Blaise Scioli, director of treasury services
at e5 Solutions Group, which works with
companies on implementing SAP nancial
and treasury applications, predicted that an
increase in the cost of bank credit will en-
courage companies to broaden their sources
of funding.
Facilities are going to become more ex-
pensive, even short-term facilities, he said.
And theres going to be a move away from
them, especially among corporates who have
the ability to, say, issue commercial paper.
Safety in Numbers?
Prior to the nancial crisis, many corporate
treasurers focused on consolidating the
number of banks with which they did busi-
ness, hoping to cut costs and become more
treasuryandrisk.com SEPTEMBER 2014 SPECIAL REPORT TREASURY & RISK 7
Any facility that represents a liquidity
backstop to some other type of vehicle that
could potentially be shut of in time of crisis
will be more impacted than facilities for
more operational or term-out purposes.
DUB NEWMAN, BANK OF AMERICA MERRILL LYNCH
Where [treasuries are] drawing the line
as far as the number of banks is probably
higher than what they would have
targeted ve or 10 years ago, when they
wanted to get down to one global bank.
JAIME RYAN, E5 SOLUTIONS GROUP
TR_SR_Sept14.indd 7 9/16/14 12:06 PM
treasuryandrisk.com
efcient. But the crisis called that trend into
question as it underscored the possibility of
bank failures.
Before the credit crisis, people put more
eggs into one basket, said Jaime Ryan,
co-founder and managing principal at e5
Solutions Group. Now they want to be able
to diversify their risk.
As a result, Ryan said, where theyre
drawing the line as far as the number of
banks is probably higher than what they
would have targeted ve or 10 years ago,
when they wanted to get down to one global
bank. Treasury teams that did get down
to one global bank, theyre the ones that are
opening up to more relationships, he added.
But others said that companies push to
consolidate banking relationships is still
going strong.
Bank of Americas Newman noted that
many corporate treasuries have made prog-
ress in consolidating their ERP and back-of-
ce systems. That enables them to work with
fewer banks, he said. They also understand
every incremental bank and every incremen-
tal account costs them money from an over-
sight perspective, and they are very focused
on reducing the number of bank accounts
and ultimately the number of banks.
Newman added that while there are still a
fair number of corporate acquisitions, trea-
sury departments never increase.
They may buy signicant assets, but the
number of people in treasury is at to down,
he said. The way they do that is by the
ability to manage information and data, and
the way to do that is decrease the number of
banks and accounts.
Strategic Treasurers Jefery cited a long
trend of people rationalizing and consolidat-
ing their banking relationships. But he also
noted a number of factors pushing corporate
treasuries in the opposite direction.
Companies add banks because they
acquire somebody who has banking relation-
ships, or they have a large need for capital or
they have a need for additional capabilities,
particularly globally, Jefery said. Or theyre
looking for diversication to help reduce
counterparty exposure.
In the end, the factors that lead treasur-
ies to add banks or eliminate some of their
banking relationships may ofset one another.
Jefery said that over the years, Strategic Trea-
surer surveys show the number of relation-
ships stays relatively consistent.
Counterparty Credit Risk
a Concern
The nancial crisis also produced a greater
interest among corporate treasuries in track-
ing the credit risk posed by counterparties,
including the companys banks.
Weve denitely seen that get added to
almost every client implementation, Ryan
said, adding that he is also seeing previous
clients that didnt initially implement credit
risk management systems coming back to add
that capability to their treasury systems.
Calculating the counterparty credit risk
posed by a companys banks can require
some work, since a company may well have
multiple exposures to a single bank, ranging
from a credit facility and bank accounts to
derivatives used to hedge risks, supply chain
nancing arrangements, or holdings of a
banks commercial paper in the money funds
the company invests in.
Credit ratings are a traditional measure for
gauging credit risk, but counterparty credit
risk monitoring can also look at a banks
credit default swaps, the prices of its stock or
bonds, and the information in its quarterly
nancials.
Weve been seeing the trend moving more and more
toward centralized bank communications.
JAIME RYAN, E5 SOLUTIONS GROUP
Harmonizing
Bank
Messages
U
sing a common conduit like SWIFT
to communicate with banks can
help treasuries eliminate a lot of the
expense and IT efort involved in linking to
each bank separately. The banking industry
has been moving toward even greater ef-
ciency by implementing ISO 20022, an XML
messaging standard, for the various kinds
of communications that ow between banks
and their corporate customers.
Were seeing more and more banks
ofering these types of standard ISO mes-
sages, said Jaime Ryan, co-founder and
managing principal of e5 Solutions Group,
adding that standardized messages de-
nitely help with the automated integration
with the banks.
But standardized messaging formats are
only half the battle, since there can still be
diferences in the content within messages
from bank to bank. Now banks, vendors,
and corporates are working to harmonize
content.
One content issue involves the types of
codes that can populate certain elds, said
Blaise Scioli, director of treasury services at
e5. Sometimes not all banks accept all the
diferent types, he said. Harmonization
takes elds like that and says, Well use
these four, but only these four.
Harmonization also sets up rules for
repeating, he said, such as allowing com-
panies to dene multiple signers for an
account, and it looks at how to deal with
free-form information.
SWIFT organized Common Global Imple-
mentation (CGI) groups to focus on diferent
standards. The Global Rapid eBAM Adoption
Team has been working on electronic bank
account management (eBAM) messages, and
its harmonization proposals for eBAM mes-
sages are currently open for comment.
More recently, CGI set up a task force
to consider whether it should make an ef-
fort to harmonize CAMT cash management
messages. The question is, to what extent
is this practical, would there be a ground-
swell of support for it, Scioli said. We
spent a lot of time on the task force talking
about scope.
TR_SR_Sept14.indd 8 9/16/14 12:06 PM
treasuryandrisk.com SEPTEMBER 2014 SPECIAL REPORT TREASURY & RISK 9
Treasuries implementing credit risk
management systems are usually pulling in
streams of market data from providers like
Bloomberg and Reuters to use in calculating
counterparty credit risk, Ryan added.
Webster said that while theres still an
assumption that certain banks are too big to
fail, company executives realize that if they
have a single bank, and that bank ends up
being forced to merge as a result of nancial
problems, they could face operational dif-
culties. Even a company with two banks that
saw one of those banks fail and merge with
the other could run into problems, he said.
From an operational point of view, I want to
originate wires from more than one bank so
that if something happens to Bank As wire
room, I also have Bank B.
The deterioration in banks credit ratings
since the nancial crisis suggests companies
should be monitoring their bank counterpar-
ties more closely, said Jefery. But a survey
conducted earlier this year by Strategic Trea-
surer and Bottomline Technologies showed
that just 36% of companies formally monitor
the credit risk posed by their banks.
The vast majority of organizations dont
seem to be able to adequately analyze their
exposures at the level or frequency they think
they should, Jefery said. They need more
of a risk framework and then they also need
technology and data.
About 20% of the companies surveyed said
their most urgent issue was aggregating the
data, he noted, while another 20% cited the
need for knowledge, transparency, and vis-
ibility as most crucial in terms counterparty
credit risk monitoring.
Down to One Pipe
At the same time that new regulations are
altering the environment for obtaining credit,
SWIFT has simplied the technology a com-
pany uses to connect with its banks.
SWIFT, which provides secure messaging
for banks around the world, began making
its services available to corporates in 2006. In
2008, it introduced Alliance Lite, a web-based
version that targeted smaller companies. Most
recently, SWIFT has started teaming up with
software providers, including some treasury
management system (TMS) vendors, to build
its connectivity into cloud-based products.
Meanwhile, ERP provider SAP is rolling out a
Financial Services Network (FSN), which uses
the cloud to link companies to their banks.
Weve been seeing the trend moving more
and more toward centralized bank communi-
cations, said e5s Ryan, adding that SWIFTs
oferings aimed at smaller companies mean
that SWIFT connectivity is no longer limited
to the biggest companies.
It certainly streamlines the process when
you can work with one entity like SWIFT or
SAPs FSN to do your connections to the bank
and then be able to streamline with single
formats, Ryan added. He noted, though, that
content is still not harmonized.
Once a company communicates with its
banks through a network like SWIFT, setting
up a connection with a new bank becomes
easier, he said. In todays world, with risk
mitigation, the desire is plug and play.
If a company wants to change banks now,
the level of efort involved in doing that is
so much smaller than it would have been 20
years ago, [given] common connectivity, com-
mon standards, said e5s Scioli. But I feel
the corporates are still largely constrained
by things like credit relationships, the ability
to borrow when they need to, geographic
considerations. I dont think weve seen that
sea change occur yet.
Theres no question corporates are
increasing their use of SWIFT, said Bank of
Americas Newman. Its on a double-digit
basis. He cited the secure communica-
tion that SWIFT provides for corporates
and noted that interfacing with their banks
using just one protocol reduces companies
technology costs.
Treasury Alliance Groups Webster said
SWIFT is a great tool for companies that have
four or ve banks and operate in various
parts of the world, because it allows them to
get daily balances and transaction informa-
tion at the same time it lowers the cost of
communicating with their banks.
But while SWIFT makes it easier for
a company to bring on a new bank, the
company still has to establish a relationship
with a bank before making the move, he said.
Webster doesnt see SWIFT causing corpo-
rates to switch banks more frequently. In fact,
he argues, the tighter communication that
SWIFT is facilitating between banks and their
corporate customers is making the relation-
ships stickier.
Im getting daily balance reporting, and
its becoming best practice to look at all
transactions on a daily basis and reconcile
all my accounts on a daily basis, Webster
said. If the company decides to switch banks,
Ive got to test all that; all my processes and
procedures have to change. If theres not a
reason to do it, Im going to avoid it.
Newman also argued that the adoption of
SWIFT wasnt encouraging companies to
change banks. I think its facilitating a lot of
great things for clients, but we have not seen
switching as something thats resulted from
the adoption of SWIFT, he said. Theres so
much more to a bank relationship than
simply the messaging part of it.
We are going into what they refer
to as a collateralized world. If Im
going to do a transaction with you,
I want some collateral in return.
MATTHEW DUNN, DELOITTE
TR_SR_Sept14.indd 9 9/16/14 12:06 PM
Health Check
How to perform a health check on your banking
relationships to ensure they are working efectively for you
By Blaise Scioli, Director of Treasury Services, e5 Solutions Group
SPONSORED STATEMENT
I
ts a fact. Corporate treasuries
are under enormous pressure
to more efectively manage
liquidity and credit, reduce
borrowing costs, shorten the cash
conversion cycle and manage
nancial risk all while dealing
with increasingly volatile nancial
markets, globalization and a
frenzy of regulatory changes.
In this crucible, increased
importance is placed on manag-
ing banking relationships; at the
same time, the ability to quickly
change providers has become vital.
The rst trend requires more touch-
es, better visibility and improved
data. The second demands increased
standardization and automation of
routine processes. Getting the best
terms and services seems to require
efort in both areas at the same time.
RAISING THE BAR
Bank relationship management begins
with bank selection, which forms the
foundation of all follow-on manage-
ment activities. Most companies require
certain characteristics and capabili-
ties from their banking partners.
Transaction support
First and foremost, the selection
analysis has to identify banks that
can provide the package of services
the company requires. It is not suf-
cient that a bank lists the required
service in marketing information. The
analysis must identify banks capable
of providing a robust cross-section
of the required services, which pass
muster when analyzed in detail:

Can the bank provide complementary

services that address fundamental
requirements? For example, if you
are seeking a bank for trade services,
can the bank support your short-term
borrowing and investing needs, while
also providing the commercial paper
issuance services you require? You
need to dene these packages
of requirements, not the banks.

For global and multinational compa-

nies, geography is critical. Can the
bank support your current business,
as well as the geographic expansion
you envision over the next ve years,
considering organic growth, M&A
activity and the like? Is the banks
footprint consistent with your collec-
tions and payments requirements?
Consider also the manner in which
potential providers address geographi-
cal coverage. Is it native within the
bank, or accomplished through other
relationships? If native, does the bank
truly operate as one entity, or do
regional diferences make it more like
working with multiple banks?
Technology is equally critical.
While many companies consider
bank technology to be a second-
ary characteristic, our experience
integrating treasury business
processes compels us to list
this as a ticket to the dance.
Operational efciency in-
creasingly depends on technol-
ogy. Even a bank that features
leading technology internally
may have inexible solutions
that cant integrate with cus-
tomer environments. Bank technol-
ogy plays a critical role in transaction
processing and information reporting
within the corporate customers ERP
environment. Additionally, technol-
ogy impacts service quality we
have all experienced the frustration of
disjointed, disparate reporting. From
a technology perspective, consider:

Is the necessary technology avail-

able to your organization?

Are the tools, information prod-

ucts, protocols and formats
that you require available?

Does the provider have a track

record of investing in technology
and keeping oferings current?

Is the banks technology position-

ing consistent with yours? Does it
operate on the leading edge, or is it
more a second-wave implementer?

Is the bank appropriately active in

standards bodies, industry groups,
etc.? Does it rapidly embed new
standards in product oferings?
Is support for products based on
older standards continued for an
appropriate length of time?
TR_SR_Sept14.indd 10 9/16/14 12:06 PM
Financial stability
Once a potential provider has demon-
strated its ability to meet your basic
service requirements in the necessary
geographical area with appropriate
technology, apply your standards
for nancial and market stability.
Nearly all companies consider banks
core nancials and credit rating,
but top-tier companies also look at
things like reputation, industry pres-
ence and demonstrated track record.
Consider only those banks that meet
your requirements now and are likely
to meet them well into the future.
Credit status
Credit considerations are foremost
in the minds of most net borrowers.
Though banks are not permitted to
bundle services with credit of-
ferings, we see in survey after sur-
vey that participation in the credit
group is a signicant consideration
in companies selection and re-
tention of banking partners.
However, treasuries should not ac-
cept subpar service delivery in critical
areas, nor should they patch together
processes using subpar technolo-
gies, to guarantee a certain portfolio
of business to credit banks. Credit
providers have a right to fair prot on a
reasonable service footprint, but each
should be constrained to areas in which
it ofers fair pricing, efective service
delivery, quality customer service and
some degree of thought leadership.
Pricing
The tight credit market during the nan-
cial crisis materially reduced companies
ability to negotiate pricing and terms
on treasury management services.
However, according to Phoenix-Hechts
2014 Treasury Management Monitor

,
companies now have some ability to
pressure banks for more favorable terms
and pricing. While pricing should not be
the only factor considered in allocat-
ing business, it is clearly important.
Service delivery, quality,
accuracy and responsiveness
A factor that is often overlooked but
is critically important to operational
efciency is the accuracy of provider
information around treasury manage-
ment services. This obviously includes
bank statements, account analysis
statements and other information-
reporting products, but it also applies to
more esoteric data such as automated
clearing percentages in the customers
ERP system, and the ability to automati-
cally process and apply lockbox details.
Quality includes a number of fac-
tors, such as overall competency,
knowledge and professionalism, and
the providers eforts to maintain the
relationship. Although quality can be
difcult to assess prospectively, it
should be measurable retrospectively.
Consider reference checks, product
team discussions and performance
in other areas, as appropriate.
A related consideration is the banks
responsiveness when issues are report-
ed. This involves issue resolution and
Service Level Agreement (SLA) commit-
ments, as well as next-level behavior like
the overall number of errors noted and
the frequency with which errors recur.
Thought leadership
Is your service provider bringing ideas
to you or just pushing products at you?
The best providers understand the
market, their own oferings and your
business, and suggest improvements
that are worthy of consideration. For
example, has your bank approached you
about electronic bank account manage-
ment (eBAM)? In a good relationship
with a great provider, synergy and
a win-win mentality should occupy
more of the agenda than outstand-
ing issues and resolution status.
On-boarding/of-boarding
One nal key consideration was high-
lighted by a Treasury Strategies survey
commissioned by WAUSAU Financial
Systems and featured in a December
2013 Treasury & Risk article: corporates
general dissatisfaction with provid-
ers ability to efciently on-board and
of-board services, businesses, ac-
counts, etc. The quality of implementa-
tion services is a critically important
topic for discussion with potential
providers. Obtaining assurances (and
documenting them, if necessary) is
easier prior to project start than once
the implementation is underway.
MINING VALUE
IN BANKING
RELATIONSHIPS
In todays challenging and uctuating
business environment, with constant
pressure on stafng, treasury needs
to better manage bank relationships
with less. This is almost impossible in
poorly controlled, spreadsheet-based
processes. In fact, in a world where
direct, fully automated, ISO-standard,
bank-neutral electronic messaging is
possible between corporate systems
and banks, it is no longer acceptable
for bank administration to be man-
aged via a maze of spreadsheets.
Mining the value buried in banking re-
lationships, and gaining the best terms
and service from providers, demands
better solutions. Our customers invari-
ably discover signicant savings when
they begin to more thoroughly analyze
bank fees and establish a routine, de-
tailed analysis of key banks/accounts.
If you nd yourself frustrated
by inefcient, manual bank ac-
count management, it is time to
consider technology that could im-
prove your banking relationships.
Insight Applied. Value Delivered.
www.e5solutions.com
TR_SR_Sept14.indd 11 9/16/14 12:06 PM
12 TREASURY & RISK SEPTEMBER 2014 SPECIAL REPORT treasuryandrisk.com
Earnings credit rate products
broaden out; callable CDs are coming.
BY SUSAN KELLY
Basel IIIs liquidity coverage ratio consid-
ers banks ability to hold onto deposits for
a period of 30 days in times of stress and
requires banks to hold more capital against
deposits deemed likely to be withdrawn. One
way to qualify deposits for lighter reserve
requirements is to show that the deposits are
linked to the corporate customers opera-
tions, such as accounts used to make payroll
or handle accounts payable.
Those deposits that dont qualify as
operating deposits will have very low value,
said Dave Robertson, a partner at consultancy
Treasury Strategies. The nice thing about
earnings credit is it clearly ties the balance to
the services.
Earnings credit rate (ECR) products give
corporates implied interest on deposits that
they can use to ofset cash management fees.
Despite forecasts that the discontinua-
tion of unlimited Federal Deposit Insurance
Corp. coverage for bank deposits at the end
of 2012 would send a lot of corporate money
elsewhere, companies continue to keep a
large portion of their short-term cash in
bank deposits. The Association for Financial
Professionals 2014 Liquidity Survey showed
companies had 52% of their short-term
portfolios in bank deposits, up from 50% in
2013. And three-quarters of the more than
700 nance executives surveyed said their
companies realized earnings credit rates on
their bank deposits.
As the new capital requirements get closer,
banks are making ECR products more attrac-
tive by broadening the time frame and the
fees that ECR can be used to ofset.
ECR products usually work on a monthly
use-it-or-lose-it basis; a months implied
interest can be applied against that months
fees, and any implied interest thats not used
in that month goes away.
According to the AFP survey, some banks
now calculate ECR on a quarterly, instead
of a monthly, basis, and some are allowing
ECR is king, and non-ECR balances are
going to have to be put into restructured
deposit products as part of Basel III.
DAVE ROBERTSON, TREASURY STRATEGIES
Banks Tweak Products
with Basel III in Mind
B
anks are preparing for the new capital requirements that will start to take efect
in the United States at the start of next year by making improvements in their
earnings credit rate products, and additional changes in banks cash management
products are expected down the road.
TR_SR_Sept14.indd 12 9/16/14 12:07 PM
treasuryandrisk.com SEPTEMBER 2014 SPECIAL REPORT TREASURY & RISK 13
companies to use ECR to pay not only cash
management fees, but other bank charges,
such as custody or escrow fees.
We see that banks have stepped up and
recognized that this is a major driver for deci-
sion making, and theyve responded accord-
ingly, either by ofering termed-out earnings
credit or theyve allowed non-traditional uses
of earnings credit, said Tom Hunt, director
of treasury services at AFP.
Robertson said the more exciting change
is the expansion of ECR programs outside the
United States.
We are seeing the largest banks allowing
companies to use ECR on U.S. dollar balances
around the world, he said. So a client with
ofshore U.S. dollars in Hong Kong, they can
ofset Asian bank expenses. Its a toe in the
water of extending ECR outside the U.S.
The second phase would be a non-U.S.
regional bank saying, Im going to roll out an
earnings credit product, Robertson added,
but said he hadnt yet seen that. ECR has
traditionally been a U.S. product because
banks in other countries didnt face Reg Qs
prohibition on paying interest on business
accounts.
ECR products are a win-win for both
banks and their corporate customers, Robert-
son said. In todays environment, balances
arent really worth much to a corporate
treasurer because rates are so low, but theyre
worth a lot to banks banks value them.
A corporate might get an ECR of 12 basis
points or 20 basis points, which is well above
what they could do at the margin overnight
anywhere else, he said. And the bank gets
stable balances that are very attractive to it.
While the level of interest banks pay on ECR
deposits is higher than what they pay in the
overnight market, banks prefer to pay ECR
on companies deposits because its more
stable and its more valuable from a liquidity
perspective, Robertson said.
ECR is king, and non-ECR balances are go-
ing to have to be put into restructured deposit
products as part of Basel III, he added.
Many banks are currently working to de-
velop products that align with the new capital
requirements, Robertson said. He noted that
in addition to operating balances, ECR values
deposits that are guaranteed not to leave for
30 days.
Banks currently ofer short-term certi-
cates of deposit (CDs), but Robertson noted
that for purposes of the liquidity coverage
ratio, a 45-day CD would ofer value over the
rst 14, 15 days, he said. After that, it would
be a non-stable source of funding.
So banks are looking at callable CDs that
would require customers to give the bank 31
days notice before withdrawing the money,
he said. Its perpetually a stable source of
funding.
One bank is piloting such a product, he
said. And I would say of our bank client
base, probably 20% are doing some sort of
development work to roll them out and an-
other 40% are doing more conceptual design
around these solutions.
Robertson predicted banks would start roll-
ing out the products this fall or next spring.
Its just a matter of how quickly they can
bring them to market.
In the long run, youre going to see prod-
ucts like [money market deposit accounts]
have a very low rate because they really are
not attractive funding for a bank, and things
like 30-day CDs become really unattractive,
he said. Banks will only ofer those as an
accommodation to their clients. These call-
able CDs will have an attractive rate because
they allow the banks to ofset loans and other
longer-term assets.
Peter Gilchrist, a managing director at
consultancy Novantas, predicted banks will
ramp up their eforts around ECR as interest
rates head higher and make other short-term
products more attractive places for treasuries
to invest corporate cash.
As you start to see rates rise, youll see
banks become more competitive on the ECR
front, he said.
Gilchrist also expects that banks will even-
tually promote interest-bearing business ac-
counts, a product made possible by the repeal
of Reg Q in 2011. And paying interest means
the money in the account is more likely to be
classied as operational funds for the purpose
of calculating reserve requirements, he said.
Interest-bearing business accounts havent
yet taken of, he said.
Theres a set of believers that say its
going to happen, as there will be more value
placed on deposits and [banks] will be will-
ing to pay interest on them, Gilchrist said.
The naysayers are saying in an environment
where so much of a banks protability is
under attack from regulatory and compliance
burdens and were looking at prot numbers
that are quite depressed, banks will hesitate
as much as possible to ofer new products.
I think youve got banks in both camps,
but larger institutions have those interest-rate
accounts on the shelf, ready to roll out, he
said. Its just a prisoners dilemma of waiting
to see who moves rst.
As you start to see rates rise,
youll see banks become more
competitive on the ECR front.
PETER GILCHRIST, NOVANTAS
TR_SR_Sept14.indd 13 9/16/14 12:07 PM
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TR_SR_Sept14.indd 14 9/16/14 12:07 PM
QBE
Replace potential liabilities with a sense
of security with QBEa company whose
experience and expertise allow us to say yes
to highly unique insurance needs.
Across all areas, our experienced Specialty Lines team provides superior claims handling
and has the ability to underwrite multiple coverages and tailor comprehensive solutions
to your risks. So be specializedand well be here to make things possible.
For information visit QBEspecialized.com
@QBENorthAmerica
QBE and the links logo are registered service marks of QBE Insurance Group Limited. 2014 QBE Holdings, Inc.
Management & Professional Liability
Accident & Health
Aviation
Trade Credit
TR_SR_Sept14.indd 15 9/16/14 12:07 PM
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Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and
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TR_SR_Sept14.indd 16 9/16/14 12:07 PM