2014 It seemed to go much better this time. After a number of companies had to scramble to place sterling and euro cash at year-end 2012 and there being some pressure at end 2013, ACT Policy & Technical have the impression that more attention from all sides has meant 2014 year-end has seemed unremarkable.
Wholesale deposits as hot money. Emphasised.Thank you Karlsruhe. The German Constitutional Court has suggested that the European central Bank should always be a preferred creditor. This conflicts with the ECB’s comments from 2012 when it had indicated that it would be willing to waive preferred status.
If treasurers did not know before, corporate (wholesale) bank deposits have become of much higher risk, with subordination to secured and preferred creditors of banks.Here is what I wrote in the April edition of Financial World (www.financialworld.co.uk) – since when we can add “bail-in” to hazards facing wholesale deposits. Financial World, April 2013, Page 22: John Grout describes why moves to make banks more resilient could cut funding to the real economy and stoke the problem of hot money in shadow banking.
The dangers of excessive leverage – by consumers, financial and non-financial companies, and governments – are commonly referred to by economists and politicians. Sometimes they go on to talk about removing the “perverse” incentive for companies to favour debt over equity: the tax deductibility of interest charges. Financial economics may tell us that – risk adjusted – the cost of corporate debt is the same as that of corporate equity, other things being equal (no liquidity differences, no taxes, etc. etc.).
Banks are very much the part of the financial universe under the spotlight at the moment. There are so many changes affecting them, from regulation, retail separation and political pressure on wages and bonuses, to euro zone pressure and recessionary risks of lending, that we are all becoming scared that they will not be able to act like banks and lend to corporations. Much effort, including from the ACT, is therefore to understand the implications of this and one path to follow is to investigate how non bank corporations might fill the gap left by bank lending.
The approach to bank relationships is at the core of a treasurer’s agenda and should from part of an overall financial strategy. For example, if a firm decides that leverage is required to earn equity type returns for its investors, then it must be able to find a source of debt finance for that leverage. So, unless it can rely totally on bond or other markets, it must need banks to provide that leverage. It is also a very personal part of a treasurer’s job, and also on the bank’s part, as links between corporate and bank boil down to
This very useful annual survey is complete for 2010 and available on both the ACT and JPMorgan website. The report is summarised very well and one of the most useful interpretations of the report is to view the trends over the years, if you have the energy and time to do more than accept the comparison to the previous report made by the authors and actually dig back. Some of the responses that jumped out at the author include: The increased number of bank relationships, which could be for a number of reasons, including
- Spreading counterparty risk