"The impact of financial regulation will be to reduce [the availability of] funding," warns Selwyn Blair-Ford, a senior domain expert for risk and regulatory compliance vendor FRSGlobal.
"It's only when corporations start screaming that they really cannot get loans, that policymakers are likely to ease the pressure on banks and allow them to increase the amount of available funding," he said. "In a strange way, much of the future of financial regulation is actually in the hands of the combined voices of corporate treasurers."
Blair-Ford's warning of the impact of onerous financial regulation on corporate finance came at a serious breakfast discussion on regulation and risk in Hong Kong. Blair-Ford, who covers compliance with international financial regulation such as Basel II, had travelled to the city from his London base to discuss these issues with local risk and compliance officers.
Changes in Europe and the US pose the most threat to corporate treasurers, even those in Asia, he said. Since many of the world's largest banks are based in either Europe or the US, any changes there will quickly disseminate to their operations around the globe.
"All firms ought to take the threat seriously that Obama might pick a fight with Wall Street or that the Bank of England may suggest the model of financial institutions be completely changed," said Blair-Ford. "I think the likelihood of these threats coming true is quite low, but having said that, one has to be mindful nevertheless."
The latest proposal by US President Barack Obama bars retail deposit-taking financial institutions from making on-balance sheet financial market bets. European regulators commented that the proposal was a "good step".
Significant limitations on corporate funding are still well down the road. While actions in the UK and US carry global implications, regulators there do not move with the opaqueness of, say, India's central bank that is known for issuing decrees and expecting near immediate compliance. While the debates continue in London and Washington, Blair-Ford has some recommendations for treasurers to stay ahead of the game.
First, learn about what is going to change and keep your colleagues, especially those in risk and compliance functions, in the know. "Better treasurers should be going out and understanding some of the new regulatory changes and actually explaining these issues to their organisation."
Blair-Ford explained that, while the solutions FRSGlobal produces are designed for financial institutions, corporates can benefit from the firm's market intelligence on regulation.
Second, prepare thoroughly for contingencies. "The impact of the [proposed] regulatory changes will be to reduce the amount of available liquidity. Corporate treasurers need to be a lot tighter in their planning so they can explain ever more clearly to their banks why and under what conditions they need contingency funding."
Regarding these contingency plans, Blair-Ford recommends firms reduce their funding dependency. "How many corporate treasurers have actually considered what happens if their banks are not able to settle their payments tomorrow? Commercial firms should ask for shadow bank facilities that in the event their main banking relationship fails, their payments are guaranteed."
Finally, shift to a long-term funding horizon. "The number one concern of a treasurer is to make sure they have enough cash in place to pay their obligations as they come due. Tomorrow and next week are obviously much greater concerns than next month or next year. What everyone has to understand is there are real benefits in actually getting your head up above the short-term horizon and looking at the long-term."
With 2008's credit crunch still fresh in the mind of many treasurers, Blair-Ford's recommendations are ever more poignant. "Liquidity is now seen as a precious resource that can disappear at any moment," he said. "The crisis showed that treasurers now have to be actively planning for disaster and crisis."
Even companies in Asia, that were generally better prepared than those elsewhere, have "no reason for complacency" said Blair-Ford and should monitor regulatory changes and prepare contingencies.
