Having previously taken easy funding for granted, treasurers are now facing up to the task of rationing scarce cash resources.
In the five years that preceded this summer’s credit squeeze, treasurers rarely had to consider liquidity – the availability of cash – when approving lending requests. Their concerns were whether their institution had sufficient capital to back a particular opportunity and whether the piece of business would generate a suitable return.
But the crisis of confidence in the banking system has changed all that.
Banks’ traditional sources of funding have dried up and cash is now in short supply. This has left treasurers scrambling to develop a system for rationing liquidity as well as capital. It is a steep learning curve for some.
“On a day-to-day basis people are coming to me and saying that they want to do this or that. Before, we might have just said ‘yes’. We did not really worry, money was very cheap and capital was available. But in the new environment we have introduced new rules. For us it is still a learning experience, and that is true of all banks,” says the treasurer of one large European bank.
“In the past there was a lot of focus on how banks managed their capital but not how they managed liquidity. It was possible to add to your balance sheet things that were capital neutral,” he adds.
With no established rubric for adjudicating between competing demands on liquidity, treasurers have found it easier to say ‘no’.
Meanwhile, the risk that banks may have to take on assets from their structured investment vehicles (SIVs) is also prompting treasurers to play the miser. Indeed, the treasurer’s traditional conservatism is being institutionally reinforced.
“In this climate, you lose your job for messing up. It is the ultra-cautious who do well. So we get rewarded for being extremely conservative,” says a treasurer at another European lender.
Treasurers say the reason they have become less willing to lend to rival banks in the so-called interbank market is not fears about each other’s solvency, but the need to conserve cash to lend to corporate clients.
That is due to a shortage of funding from the money market funds on which banks have come to rely in recent years, although the foreign exchange accounts of Asian central banks have been more reliable suppliers of funding.
Money-market fund managers agree.
“There is a sense of paralysis. Funds are scared of withdrawals by their investors so they are being as risk averse as possible and don’t want to touch banks,” says one.
Another says: “Our fund has about 30 per cent of its money in cash now. That is pretty typical of the industry. That means that when confidence returns, there could be an amazing change in mood – all that liquidity could come in. But right now, that is not happening at all.”
Some market participants are confident the tide could turn in the New Year, now that the European Central Bank has made cheap funding available over the Christmas period.
One treasurer says January could even see “euphoric” conditions.
If so, he would seek to raise more cash by issuing cheap senior debt in the expectation that any such window of opportunity would open only briefly.