Global Cash Management technology and regulatory shifts transform banking relationships

Transcription

1 Global Cash Management technology and regulatory shifts transform banking relationships

2 For both Barclays and its clients, changes to regulation and the data revolution mean that the old model of simply being a service provider is no longer tenable. Collaboration with clients is now crucial to adding value. This was the key message to emerge from Barclays first ever Global Cash Management client forum, which took place in mid-september this year. The forum was attended by diverse organisations, including a utility company, an international charity and a construction materials supplier. Discussions ranged from the new regulations ushered in by Basel III through to broad themes surrounding Big Data and their practical application in Barclays iportal, which provides clients with a single point of access to all business services. Effective liquidity management The ever-expanding list of regulations that address liquidity risk is affecting the way in which both banks and clients manage liquidity, according to Yera Hagopian, Head of Liquidity Solutions at Barclays, who spoke at the Global Cash Management forum. Looming large over all the regulatory changes that have been happening since the 2008 financial crisis has been Basel III. Two areas in particular where Basel III differs from earlier incarnations are liquidity risk and transparency: The new regulatory concepts fundamentally change the way that banks think about liquidity. Looking first at a short-term stress, the primary change is the introduction of the Liquidity Coverage Ratio (LCR). The idea of liquidity stress is not new. What is new is the rather more prescriptive approach to determining outflows that Basel III introduces, which depends on the type of underlying business operational versus nonoperational, client segment and contractual maturity. Basel III acknowledges that operational balances (used to pay salaries and suppliers and to collect sales proceeds, etc.) are far less likely to move during a stress period than non-operational balances. The new regulatory concepts fundamentally change the way that banks think about liquidity Liquidity Whereas previous iterations of Basel were concerned with capital, Basel III recognises that some of the primary failures of the last financial crisis were the result of insufficient liquidity. As a result, Basel III has an extensive liquidity pillar which looks at both short-term and longer-term stress. It even considers intraday stress, though this is probably an area best described as work in progress rather than a final set of regulations. 2 of 7

3 The primary impact for banks is the need to distinguish between deposits, which all used to be viewed as equal. Under the new rules, any deposits that are deemed likely to leave during the stress period require a pool of high-quality liquid assets to be in place. The cost of maintaining this liquidity pool needs to be considered as part of economics of holding the client s deposit and of course it varies materially depending on the operational or non-operational nature of the relationship, the type of client and the contractual maturity of the product. The full consequences of these new regulatory measures are yet to be seen. Basel III is being phased in, and countries and banks are at different stages of implementation. Barclays is already fully LCRcompliant. However, it is becoming clear that there are a number of intended and unintended consequences that have the power to reshape liquidity management. Non-operational cash from financial institutions, all of which is deemed to leave during a stress period, is obviously far less attractive than an operational deposit from a corporate client that only attracts a 25% outflow assumption. The change in the value of different deposits for banks has potential implications for the way in which clients allocate their wallet. Deposits have always represented perfect opportunities for ancillary business, but now may be less attractive depending on the nature of the deposit. It was agreed by all those who attended the forum that transparent discussion of the way in which banks view different deposits was vital for a good relationship. Some felt that there was an opportunity for banks to share client specific data on the regulatory treatment of their balances. Leverage Another new aspect introduced by Basel III is the concept of leverage. Obviously, this is an aspect that mainly concerns capital, and its relevance to cash management is not immediately apparent. In essence, it brings in a second measure of capital which is far less nuanced than the risk-adjusted view of capital as measured by RWAs. One of the products potentially affected by leverage is multi-entity notional pooling. The issue here is that the Basel III definition of leverage does not take netting into account. Despite the documentary pain represented by notional pooling (cross guarantees, etc.), the balances within a multi-entity notional pool cannot be netted for leverage purposes (although they can still be netted for RWAs if the documentation is complete and other conditions are met). Multi-entity notional pooling is one product potentially affected by leverage but other potential solutions exist Does any of this matter? Potentially yes. Previously there was one measure of capital, now we have two. The more challenging measure will dominate but it is very difficult to anticipate which of the two RWAs or leverage this will be. If a bank on-boards a large number of clients with significant gross positions in multi-entity notional pools, it could lead to a rapid and potentially uncontrollable deterioration in its leverage ratio. 3 of 7

4 There has been some talk of the demise of notional pooling as a result although given the convenience of the solution for clients, demise is probably too strong a word. But it is clear that, in future, banks will need to understand clients proposed usage of multi-entity pools much better and potentially be more selective in their use. For example, where pools have not been managed actively, a short-term cash management solution has had the potential to morph into long-term structural financing, now with a material balance sheet footprint. Clients should therefore consider how they utilise notional pooling solutions, what gross and net positions are likely to arise, and how these can best be managed. If notional pooling solutions look like they may be challenging to implement, other potential solutions do exist. In addition to physical concentration, for European cash management solutions the arrival of SEPA facilitates the use of virtual accounts, resulting in a much streamlined bank account structure and the benefits of an in-house bank to optimise liquidity. Multi-entity notional pooling is one product potentially affected by leverage but other potential solutions exist There was a general consensus at the forum that multientity structures probably would become less popular, as banks in this arrangement cannot manage the solution as effectively. As one attendee noted: with legislation going only one way, corporates are being forced both to be more creative and to build transparency. Big Data Big Data is certainly one area where Barclays sees partnership with its clients replacing the old model of service provider. The scope of the data revolution in terms of the amount of information available and its relative cheapness presents huge opportunities both for the bank and its client base. Any insights provided need to be actionable not just pieces of data At the client forum, Nick Hall, Managing Director of Analytics within Barclays Information Business, spoke about two crucial phenomena in this area: Moore s Law and Kryder s Law. These respectively state that the density of semiconductor processors and density of magnetic storage both double in very short timeframes. There are two effects. First, it becomes cheaper to have more data, and, second, more can be done with it. Citing the example of Amazon, Nick Hall said: This company can now do things on a completely different scale. It no longer looks at the market the person is buying; it now looks at where the product is going. The move towards collaborative filtering looking at associations amongst the products themselves, has been tremendously important. Today, one-third of sales are from Amazon s recommendations. 4 of 7

5 In a similar vein, Barclays SmartBusiness is dedicated to helping its corporate clients make better decisions. One way that Barclays can help its clients with the decisions that matter is through contextualising their data examining customer dynamics versus those of competitors or similar players. This is key to adding value to what is otherwise a slew of raw data. As one attendee pointed out: Any insights provided need to be actionable not just pieces of data. Mueller hopes that the data can be used to make Barclays clients more successful than those of its competitors. He notes: What is required is businesspeople not data scientists. Banks should be heading away from pure commodity services to the role of business partner, allowing clients to become more successful. iportal Barclays iportal, a single access point for all business services, is a striking example of how a bank can engage with its clients innovatively and enhance the way they experience the banking relationship. The iportal is all about giving clients choice The use of finger verification should making logging in both easier and more secure. All the services and information on the client s homepage can be moved around by the client, to make things as straightforward and user-friendly as possible. Ashton noted that so far, clients had not required training on the new system, as it is very intuitive. The group was unanimous in being happy for the new system to be switched on just like any other software upgrade. Collaborative banking relationships hold the key Given the diversity of clients, a standout from the discussion was the common feeling of wishing to have more collaborative banking relationships. Transparency makes for a richer way of working As one client noted, relationships are driven by transparency and trust. Whilst obviously allowing for commercial sensitivities, more openness is valuable. For her, transparency makes for a richer way of working. Rather than having multiple bank relationships, there was a feeling that partnering with one bank that took a holistic approach was more conducive to developing such transparency. Big Data is undoubtedly an area where Barclays can add value for its clients, but this cannot be just a commoditised service. As Nick Hall says: By understanding the market, we can better serve our clients. The iportal provides a huge array of services and information. However, the key message here is that Barclays is not trying to make clients choose between a face-to-face or digital relationship with the bank. As John Ashton, Managing Director of Digital Client Access at Barclays, says, It s all about giving clients choice. 5 of 7

6 Summary The clear message to emerge from Barclays first-ever Global Cash Management client forum is that rapid industry developments both technological and regulatory are causing the relationship between banks and their corporate clients to change. The bank s role is moving from that of service provider to partner. The regulatory developments leading this change are heralded by Basel III. While the full consequences of its focus on liquidity have yet to be seen, it is the manner in which Basel III addresses leverage in particular that suggests the need for more collaborative relationships. As notional pooling declines, it seems likely that one strong banking relationship to manage clients solutions will replace multi-entity banking arrangements. Technological change, too, suggests partnership and collaboration are replacing the old model of service provider. The scope of the data revolution presents huge opportunities for both Barclays and its client base, with the bank s SmartBusiness dedicated to helping its corporate clients make better decisions. Barclays iportal, meanwhile, demonstrates how a bank can engage with its clients innovatively, whilst at the same time increasing clients choice. There was a consensus in the forum that new levels of collaboration between bank and client require new levels of transparency and trust. A consistent response from forum participants was that partnering with a single bank that takes a holistic approach is more conducive to developing those crucial relationships. In this spirit of openness, clients were pleased to provide feedback following the forum, which could be used as a source of future discussion. Participants were also keen for the forum to be the start of a regular dialogue and idea-sharing, that builds on the principles of collaboration and partnership that are becoming essential in this rapidly changing environment. 6 of 7

7 barclays.com/corporatebanking Every attempt has been made to ensure that the information provided is accurate. However, neither Barclays Bank PLC ( Barclays ) nor any of its employees makes any representation or warranty (express or implied) in relation to the accuracy, reliability or completeness of any information or assumptions on which this document may be based and cannot be held responsible for any errors. No liability is accepted by Barclays (or any of its affiliates) for any loss (whether direct or indirect) arising from the use of the information provided. Barclays is a trading name of Barclays Bank PLC and its subsidiaries. Barclays Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (Financial Services Register No ). Registered in England. Registered number is with registered office at 1 Churchill Place, London E14 5HP. Item Ref: BM November 2015.