ECB On Right Track

The complete
ECB logotype

Stressful situations requires boldness, cold mind and a warm heart. During stress a leader must be able to take risks and point out the direction despite not having time to perform complete analysis and he or she even has to take unexplored routes. This is what the ECB (European Central Bank) did on the 21 December when they granted a 3-year 490-billion financing to the banks, at the unbeatable rate of 1%. This action is proof of bold leadership and may not work without hiccups but with the information we have today it seems to be a clever thing to do. It will certainly counter some of the liquidity quota problems in Basel 3.

Mario Draghi

This is a quote from a Financial Times interview with Mario Draghi, new head of the ECB: "The objective is to ease the funding pressures that banks are experiencing. They will then decide what the best use of these funds is. One aspiration is to have them financing the real economy, especially small and medium sized enterprises (SMEs). What we are observing is that small and medium sized banks are the ones having the biggest funding difficulties, and they are generally the ones who provide most of the financing for the SMEs. And SMEs account for about 70 per cent of employment in the euro area’s corporate sector". 

I have had some discussions with people in the industry and there are two main scenarios as to how effective this program will be.

Optimistic Scenario
Since the European leadership previously has done several blunders unnecessarily escalating the debt crisis to unforeseen levels, something had to be done. Too many investors are leaving the European debt markets, they have especially stopped investing in sovereign and bank debt. A similar operation is planned on February 29, 2012. The credit institutions may use this new cheap resource to finance governments, corporates (remember the emphasis on the SME, often being the weak links in the supply chains) or households, or merely to anticipate the refinancing of most of the banks own 600-billion debts maturing in 2012. In both cases, this operation will provide them with a few dozens of billions of Euros of additional profits over the next 3 years, some easy money to facilitate their recapitalization. 

Pessimistic Scenario

Will the Transmission Effect
work this time?

Draghi does not say that this money will go to the SMEs or weak, but important lenders, he says that ideally it should go to them. However the banks can do whatever they want with this money. Many people working in the banking sector or in the capital markets don't believe banks will use these funds to finance the economy instead they will keep them to refinance their own debt maturing next year and deposit them with the central banks and finance old lending only. That is actually what they did with the hundreds of billions injected in 2008-2009 blaming a sharp fall in credit demand and surprisingly got many central banks believing them. 


Recommendations
This huge bank financing scheme could have been combined with a method to limit how much a bank can deposit with the central banks to ensure the so called Transmission Effect remains effective. 


The ECB might also consider introducing certain quotas of collateral originators, e.g. x % for SME, the banks have to submit to receive the funding. This could be expected to ensure the ambition to steer the funding to the ailing sectors. 

Missing Tomas and Season's Greetings

This Tuesday Tomas, a very dear friend passed away. He had been ill for quite some time and fought bravely and forcefully his lethal disease. Tomas was wonderfully crazy and always full of ideas. Talking constantly sharing his thoughts with everyone. He was very particular with whom he spent time as if he wanted to optimize to whom he gave his energy. Tomas is a role model of how to live a life and a great source for inspiration. Meeting Tomas was always extremely energizing. I'm very glad he could be active, making plans and starting projects to the very end. He left this life as he had lived it, full of ideas, positive, and energized. I also want to send special greetings to Tomas' wife, another dear friend, with same qualities as Tomas. She described Tomas as someone who didn't regard life as a problem to solve, instead as an opportunity to enjoy. 

/Magnus

Starting this blog has been a very valuable experience. It has taken us places, made friends and acquaintances we could only have dreamt of before. To all of you reading and supporting this blog, we thank you. To all of you who have joined our private network, the Peer Group, we are proud of being in your network. To all of you who sign up to our ambition to create an optimal global financial regulatory environment, we thank you. 

Look forward to talk to you, to meet with you and to work with you in the coming year. We are always available for a call.

Aneth Eriksson, Magnus Lind, Susanna Bondéus

We wish you a wonderful Christmas and a Happy and Prosperous and Healthy New Year!

Titles in Treasury Updated 2011-2012

Mike Richards, MD
MR Recruitment

The treasury industry has specialized recruiters with a vast knowledge of the treasury profession and impressive track record and networks. One of them is MR Recruitment with front figures Mike Richards and Mike Tucker. They are really experts in their field and we are particularly impressed they manage to cover almost all corners of the world. If there is someone knowing the global recruiting trends in treasury it is these two Mikes. When we met recently we discussed trends in recruiting and the MR Recruitment's salary survey. 

As part of that survey is their definition of someone’s official job title. When they review the information of the participant in the survey they have to consider factors such as:

• how many people report into them
• how long someone has worked in Treasury
• what size of treasury department does someone work in
• the size of company and how this affects the complexity of the treasury operation

They therefore have to sometimes reclassify someone’s official title using the following guidelines:

Secret Mike

Group Treasurer

• Head of the Treasury Function
• Reports directly to the CFO / FD
• Potentially on the board of the treasury entity or similar
• Is ultimately responsible of all treasury operations of the group

Deputy Treasurer

There is often only one Deputy Treasurer. They will be the clearly defined second in charge of the treasury department they will be the absolute Deputy for the Group Treasurer. As deputy they have the same “sign-off” capability that the Treasurer possesses and would be expected to act in their stead whenever needed, whereas an Assistant Treasurer would be expected to refer many major decisions to / through their Group Treasurer.

Assistant Treasurer

Often there are two Assistant Treasurers in the group. Typically one may focus on front office activity and supervision of the operations team and the other Assistant Treasurer will oversee treasury control and the middle / back office functions.

International / Regional Treasurer

This position often has a number of similarities to that of Deputy Treasurer however they will usually report into a Global / Group Treasurer and will not be number two in the overall group treasury function. It will be considered a senior treasury role but they will have specific responsibility for an area linked to geography, global financial markets, group risk etc.

Mike Tucker, director
MR Recruitment

Typically from then the following are titles with linked responsibility areas:

• Treasury Manager
• Cash Manager
• Treasury Dealer
• Treasury Accountant
• Treasury Systems Manager
• Treasury Analyst
• Treasury Assistant

The European Treasurers' Peer Group is very successful in recruiting the most experienced treasurers to the peer group where we many times discuss the new role of the treasurer and business leadership. There are many examples when treasurers have taken on the role as business leader. 

To Basel III or Not to Basel III

Our famous Hamlet with a
very dead bank

This is the very detail oriented program for a 2012 Basel III event in London. Only analysts, bank directors, vendors are invited as speakers. Not any of this event's target groups are corporate representatives, or any other major stakeholder, e.g. unions, or consumer groups. This is an upside down world. The Basel III regulation is the financial incentives and framework for the whole world (anyway it's the intention) and only a group of experts are involved in the design. That is really scary!

Remember that the Basel I and II had the intention to create financial stability and avoid banks defaulting. How successful have these experts been? Shall we leave them alone one more time or join them and arrange for a transparent discussion with all stakeholders agreeing? That's the question...

• Find "Basel III for Dummies" here...
• Apply to the Peer Group here...
• We need a Radical Rethink
• If the event organizer wants to sign me up as a speaker here...

Corporates Key Choices from Regulatory Pressure

Stefan Ingves, Governor
Central Bank of Sweden,
presently Chair of the
Basel Committee

After meeting with a large number of peers during our European tour, currently in the UK, and talking to many of you, group treasurers, CEOs and CFOs, over the phone we understand you share a deep concern over the present credit crunch and the outlook for the future. We have also been in frequent and close contact with large banks and other players in the market. The conclusion is clear that the new regulation, mostly Basel III and the OTC regulation, will impose severe restrictions on corporate lending and risk management from banks. The corporate community reacts on this fact:

1. Default reaction – Pragmatically adjust the business to the new conditions. In this case it means adjusting to less availability of cash leading to reduced employment, growth, investments, cash tied up in new margin calls, increased vulnerability of the supply chain etc

2. Necessary reaction – Build up a new ”corporate financial system” with peer to peer lending, derivatives trading, A/R auctioning etc. The strongest company in the supply chain will have to take increased financial responsibility for the weaker parts

3. Optional reaction – Actively act to change the new regulatory regime. Here is where the peer group and this blog come in....

1 and 2 is already happening and by passively adapting to the situation we risk further severe disruptions in the global economic activity. 3 is at the moment not even contemplated by the corporates themselves. The reason is that the probability of the regulatory framework to change is regarded as slim and there has been no uniting force voicing the concerns of the corporates. Contact me if you want to discuss ideas to change the situation.¨

Peer to Peer Hedging

Yesterday we met with Philippe Gelis, CEO of Kantox, definitely a smart guy (check him out on linkedin). He and his team has a very interesting new solution for peer-to-peer derivatives trading starting with foreign exchange. Regulated under the FSA in the UK Kantox provides a platform for corporates to connect and peer to peer exchange foreign currency exposure. We were very impressed by the simplicity of the solution and have chosen to publish it under our page "Time for a Radical Rethink". 

The European and the American Way

A Swedish ministry of treasury remarked already in the 80-ties that the more we spent on health care the less we got. Bureacracy is in the European DNA since centuries.

Before the EMU (European Monetary Authority) we had 17 central banks managing 17 currencies and 17 interest rates. In EMU they all replaced their currencies to EUR but we now have 18 central banks. In Europe bureaucracy is constantly added and never questioned or forced to transparently present its value add to society. There seems to be a total lack of respect for the tax payers' money.

Au the contrary the actions to remedy the financial crisis in the US were swift and precise. On July 20, 2010 President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. The Act is comprised of 16 titles, more than 200 new rules, 60 to 70 studies and 22 periodic report. End of story.

In Europe we tried to increase the financial stability by adding several new authorities in the European Systemic Risk Board (ESRB) and three new European Supervisory Authorities (ESAs). The ESAs are comprised of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA). These new authorities was added to the three bodies we already had, which wasn't regarded as powerful enough. In turn the ESAs shall work in a network with all the existing 27 national supervisory bodies. In addition the European Financial Stability Facility (EFSF) was introduced to supply financial support to ailing EU sovereigns. I stop the listing here despite it can be much longer...


It is obvious the European solution is never going to work and it won't be increasing neither financial stability nor transparency. As with most public authorities they will strive to restrict their responsibilities over time and the gaps between what they actually perform and what we expect from them will grow bigger and bigger. And it is impossible to see the big picture and how each authority fit in and what they actually are supposed to do. That is very convenient for the bureaucrats of course. There is actually something like a free lunch. The EU is sadly a perfect example of how bureaucracy is self feeding and performing less the bigger it gets. 

There is a huge difference between the European and the American way and I'm really concerned about Europe, there is not any leadership, just an enormous overhead. That was not what the EU intended to be and I feel betrayed.

We can now also see why it is so important for them to:

1. Implement a tax on financial transactions since they believe it will create more income to support and increase their numbers and sizes

2. Censor the rating agencies to decrease the transparency so no one really sees what has and is happening.

Corporates need to voice its opinion

Another sad effect is that the immense funding needs of this overhead is forcing Europe to pay extra high taxes and of course bureaucrats introduce bureaucracy forcing corporations doing lots of none value adding activities. It is no wonder Europe is lagging in growth and has high real unemployment since the corporate world is pragmatic. If Europe is not structured to promote, instead demote corporate activity it will decrease and since decades we have experienced a silent revolution where corporates have abandoned Europe and few new have appeared. Soon there will be an infliction point where it all has to be reversed. We are getting closer and closer to that point. I believe we must voice the corporate position more widely. CEO, CFO and Group Treasurer of companies say they are not paid for philosophical or even political discussions. That is correct. However we all have a responsibility to voice our concerns of the development of our homelands. Support this blog by becoming a "follower" and/or join the peer group so we can act.

Great Analysis of Basel III by S&P

I have kindly received the permission from Standards and Poor's to publish this analysis on the effects on corporates from Basel III and Solvency II. I'm not opposed to tightening of capital requirements as such since it will impose higher financial discipline in society. However the most disciplined and well governed sector is the corporate sector and they do not need higher capital requirements per se. We also need to consider the large tax burden the European corporations has to pay, e.g. largest social contribution, high capital gains and income taxes for entrepreneurs, large hidden taxes in the sense of immense and multi-layered bureaucracy and expensive labor laws. All these costs has to be financed. If the highest capital requirements are imposed on the corporates, how are they going to finance all this and have any cash over to run and grow the business? That is the crucial question.

We also see a significant risk for the SME sector, being the weakest parties of the supply chain, already basically unable to attain sufficient financing. We should respect that a very large part of the population is employed in SME and they require working capital. If the banks are pushed out from SME financing the strongest company in the supply chain will need to step in or we need to find other solutions.

The sector in most urgent need of very tight governance are the sovereigns but they will remain capital requirement favored. The crowding out of the corporate funding is a huge risk, which will continue to enforce the misallocation of capital being a major cause behind the present crisis. We need a paradigm shift in regulatory strategy. 

An interesting quote from the S&P paper on new initiatives in the corporate financial markets:

"When considering the future, it’s tempting to make the mistake of projecting changes in a static environment. Capital markets have in the past shown their capacity to reinvent themselves with the emergence of new players and innovative sources of funding. In the current transition phase that could prove to be challenging for corporate borrowers, we believe such innovation may well influence the development of the capital markets."

It's Time for a Radical Rethink

We have introduced this new page where providers of new models for financial services firms are listed as they appear. The first firm is Corporate Funding Association (CFA) in Paris.

Connected through peers Susanna and I met with Philippe Roca of Corporate Funding Association (CFA). CFA is a project aiming to build a bank only focusing on corporate lending to counteract the regulatory actions to force the banks from corporate lending. The Basel III framework is very aggressively and consistently acting towards corporate activity and most likely it will be implemented to its full extent only in Europe since other regions will probably not let their corporate community suffer from lack of corporate funding.

The CFA is looking for more members joining so contact them if interested. Contact details and more information here.

Ideas to Improve Corporate Funding

Cash for corporations are drying up fast now and it is becoming more worrying for each and every day. This is a short posting to list and link to three measures I have discussed with peers to improve corporate funding:

1. The financially strongest party in the supply and demand chain introduces supply chain financing programs
   
   
2. Central banks limit the amount of deposits they accept from each bank forcing excess liquidity out to the real market
   
   
3. Delay tax collections

There will be other ways presented soon on a blog near you :)

Please send me ideas and I'll post them. We need to work together on this.