Even the slightest regulatory decision or change in the international environment can affect the availability of financing, access to cash, or the perceived solvency of certain counterparties.
Companies are currently navigating with limited visibility, trying to find new reference points in the murk. There is a constant stream of geopolitical crises, tougher regulations, monetary instability, international sanctions and tariffs, all of which represent major upheavals in terms of managing financial flows. Treasurers are often seen as having a technical role, but for many companies they now play a crucial part in defining strategy.
International tension now part of the equation
The time when treasurers could focus on bank balances, short-term interest rates and supplier payment times is over. Today, a regional conflict or the application of sanctions by one country on another can have immediate effects on cross-border payments, supply chains, exchange rates and access to foreign exchange in respect of certain currencies. Dedollarisation is a recurring subject, one that is in the spotlight again because of trade friction and US sanctions. However, despite stated intentions to reduce reliance on the dollar and its recent decline, the US currency remains dominant. Its liquidity, its role in global trade and the lack of a credible alternative mean that it continues to play a central role in securing international transactions.
This new paradigm is directly affecting the Treasury departments of companies, but also those of banks, which must also fulfil specific prudential obligations. The world has become fragmented, and so have financial flows.
A company’s Treasury department must now keep a close eye on developments, try to anticipate them and show flexibility.
As well as looking at the company’s internal capital flows, it must analyse its exposure to all external risks: country risk, legal changes, changes in foreign exchange arrangements and political and trade uncertainties. To help the company adapt, the Treasury department has a number of options: it can diversify its banking partners and the regions in which it collects payments, adopt realistic stress scenarios that factor in various external shocks, co-ordinate more closely with the company’s legal, risk and compliance departments, and above all gain a comprehensive, real-time view of financial flows by using high-performance information systems.
For a bank, cash management relies on an even more complex architecture. As well as the Treasury department, it involves the asset-liability management (ALM) committee in charge of balancing the bank’s financial position across different time horizons. The ALM committee must fulfil a multitude of obligations regarding liquidity (LCR and NSFR ratios), capital adequacy (CET1 ratio) and the exposure of the bank’s cash position to financial markets, along with banking resolution rules, i.e. mechanisms designed to manage potential bank failures by minimising their consequences for the real economy. The smallest regulatory decision or change in the international environment can threaten the availability of funding (including access to credit, the ability to raise funds and the amount of available liquidity), access to foreign exchange and the perceived solvency of certain counterparties.
All this means that Switzerland’s finance industry is facing increasing complexity. Banks and companies must meet tougher requirements in terms of compliance, transparency and transaction monitoring, particularly as a result of extraterritorial rules such as international sanctions. Switzerland must therefore adopt an active and appropriate strategy in terms of cash management, so that it can maintain its historical strength as a multi-currency financial centre. To make things even more difficult, it must also focus on access to foreign exchange, counterparty analysis and transactions in risky regions.
A strategic, cross-discipline approach
Because of the greater level of sophistication required, Treasury departments can no longer operate as silos. They are becoming cross-discipline entities, with links to all of an organisation’s sensitive functions: finance, legal, compliance, risk and institutional relations. They must deal with changes in regulations, sometimes imposed by foreign jurisdictions, along with the effects of monetary fragmentation – making financial conditions such as interest rates and access to credit very different between countries in the same monetary zone – and extraterritorial sanctions, not to mention the strategic implications of trade disputes. The new situation is also bringing with it increased demand for talented people with hybrid skills – financial, technological and strategic – who are not just well versed in standard Treasury operations like interest-rate and currency hedging and above all liquidity management, but also understand multi-jurisdiction regulations.
At a time of volatility, political instability and trade tensions, the Treasury department is emerging as a centre of expertise that can provide the right solutions to address the needs of a company and its various departments. Its role goes well beyond organising financial flows: it now has significant input into the way a company manages liquidity, optimises its balance sheet and controls financial risks. It also plays an essential role in allocating a company’s resources efficiently, supporting its various business lines and ensuring that its operations are compliant.
Organisations that fully adopt this strategic dimension will be better prepared to deal with future crises. To sum up, the Treasury department is becoming an operational nerve centre, one that is vitally important to a company’s performance, resilience and overall direction.
