November 10th, 2009
Most companies have multiple bank accounts. At any particular moment some of these may have positive balances and others be overdrawn. The problem of managing these account balances is exacerbated when the company operates in a number of countries and has accounts in a variety of currencies. Corporate treasurers have four prime objectives in terms of cash management:
Minimize funding costs. Multinationals maintain bank accounts in many countries. At any given moment in time some accounts may have a positive balance and others be overdrawn. It is therefore important to minimize funding costs on those accounts that have a negative balance.
Maximize returns. In like manner the treasurer seeks to maximize returns on accounts with positive balances.
Manage liquidity. The company must also manage its cash positions in order to be able to pay its suppliers, employees and other creditors in a timely manner.
Remain within the law. In many developing countries the laws concerning cross-border foreign exchange transactions are complex and may be open to interpretation. A multinational has to take care to remain within the legal restrictions that exist in each country in which it operates.
This is where banks come into play. Their cash management groups ensure that they remain current on all the legal constraints and provide the necessary systems infrastructure. There are two principal methods employed:
Sweeping. Sweeping involves the physical transfer of funds (albeit by electronic means) between accounts in different countries. Care has to be taken for two reasons. Countries with foreign exchange controls do not permit sweeping. The second reason is that such transfers may be viewed as intercompany loans and this may have adverse tax implications.
To further complicate matters differences in time zones between countries, and even within countries, must be taken into account.
Pooling. Pooling involves a notional consolidation of a company’s accounts. The bank then calculates interest to be paid or due after netting the returns on the balances.
This is a gross simplification of what is a highly complex business segment requiring sophisticated infrastructure, an international distribution capability and secure systems. Some banks use cash management as a loss leader because it gives a huge insight into its customers’ cash positions and flows and because it is likely to give rise to related business in areas such as trade finance and foreign exchange.
Tags: bank account, cash, Cash management, funds
Posted in Cash management | Comments Off
November 9th, 2009
Given all of the factors involved in determining pricing and granting approval it is a wonder that a bank ever makes any loans. Adam Smith’s “invisible hand” plays a major role in pricing. This is more apparent in the bond market where information and terms on issues are in the public domain. Bonds are also issued in a standardized form. Term spreads and credit spreads can both be inferred from market prices. Banks hide behind secrecy laws and a desire to keep potentially price-sensitive information on the loans that they are making to themselves. The best sources of information on actual loan pricing (rather than published rates such as Prime) are the borrowers themselves and the syndicated loan market. Customers may tell one bank what another is offering to try to get the best terms available.
Over the past 50 years or so there has been a shift away from “relationship” banking to “transaction” banking with customers always taking the deal with the lowest price. Relationship banking was arguably helped by the presence of local monopolies in some countries and by regulated lending rates in others. Their breakdown has led to an increased level of price-based competition.
While this shift has certainly occurred relationship banking is not yet dead. Maintaining banking relationships with a relatively small number of banks has its advantages. Account managers at these banks build up a better understanding of the company’s longer-term financing requirements, seasonality and cyclicality of cashflows. Credit decisions can be made relatively quickly.
These banks are likely to be able to approve requests for credit faster than banks that lack that experience. The acid-test, however, comes from the actions that the bank takes when a company is going through a difficult period, whether this is due to external factors such as a change in the macro-level environment or changes in industry structure or competition. A bank that cuts credit lines to a company at the first signs of trouble is likely to find itself frozen out in the future.
Management at most banks have to deal with the reality that corporate loans have very little product differentiation. Barriers to entry are low and there is a wide range of substitutes. Under such conditions banks in most countries are price-takers. The best they can do is to get their operating and appraisal costs down and to get the optimal balance between the costs of attracting cheaper funding and the costs of those funds.
Tags: Banking, banks, bond market, bonds, pricing
Posted in Banking | Comments Off
November 8th, 2009
The goals that underpin consumer choice can usually be met in alternative ways. If two products cost the same, a consumer will choose to buy the one expected to have the higher benefit. On the other hand, if two products yield equal benefits, the consumer will choose to buy the cheaper one.
Fundamentally, we assume that consumers are rational costs and benefits of alternative choices.
Tags: Assets, consumer choice, equity
Posted in financial market | Comments Off
November 7th, 2009
Because of scarcity, we all have limited incomes. The limited nature of our income requires us to make choices about which goods we will and will not buy. When more of one good or service is bought, we must buy less of some other goods if we are to stay within our budget.
Tags: cash, inancial market, Income, mortgage
Posted in Income | Comments Off