Who has a good long term bottom-up liquidity forecasting?

Many of the treasury peers I talk to regularly do not have a sufficiently good bottom-up forecasting process. With bottom-up I mean a process where the operating units and group staff supply data to a centralized forecast. Actually I only know of a handful companies and they all developed the forecasting under the pressure of past severe cash constraints.

Lately I have come across a few companies who were cash rich when they were acquired by private equity stripping them of all cash. And it is remarkable what discipline the company achieves immediately. Like the saying goes “there is nothing that focuses you mind more than a near death experience or high leverage”.

I would actually promote all corporates to enforce cash discipline by taking cash surpluses out of the operations. Lack of cash has the strength to enforce discipline in the whole organization, not only in treasury. This is how many very successful entrepreneurs have built their companies, always forcing them to survive on very scarce financial resources. It becomes much more lean and effective. And it implements excellent bottom-up liquidity forecasting solutions.

How does Basel II affect corporate treasury?

After the Herstatt default in 1974 and a general worry about obscure domino effects in the financial market by regulators and politicians, Bank of International Settlement (BIS) developed the Basel regulation. My interpretation of the directives that formed Basel I (originally Basel Accord) that later was reformed into Basel II was to avoid a bank failure at all costs. This meant that the regulation should be constructed so that it would make it more costly for the banks to have corporate risk than risk that easier could be collateralized, e.g. lending to real estate. Since Basel Accord we have experienced two very severe real estate bubbles, in 1990-93 and this one going on now.

And in the past decade we have experienced that the banks’ portion of the corporate loans has decreased dramatically in favor of public loans being financed through different kind of funds outside of the banking sector.

Basel II actually makes corporate lending, derivatives, closing out positions extremely costly. Many banks have yet to be able to relate the positions and pricing to each individual customer and compare it to the capital requirements imposed by Basel II. But sooner or later they will be able. And what consequences will we see from that? Will the derivatives spread increase, banks back out of corporate business? I will talk to treasury peers on this problem.