Financial executives should take note that the Federal Reserve recently began stress testing prolonged negative 3-Month US Treasury rates and how they would effect financial institutions.  Should CFOs & Treasurers be conducting similar scenario analysis as a proactive liquidity risk management practice?  

One of the key lessons financial executives learned during the 2008 financial crisis is that dramatic changes in the money markets can materially influence corporate liquidity positions.  The money market environment would be vastly different if the Federal Reserve were to implement prolonged negative 3-Month US Treasury rates.   As reported by Bloomberg, the reason why the Federal Reserve avoided negative rates during the 2008 financial crisis was because they wanted to avoid a "dangerous dislocations in the money markets." 

Bloomberg goes on to mention that the Federal Reserve stated that "This [negative rate stress test] does not represent a forecast..."  CNBC is reporting that the Federal Reserve is now using negative rates as part of their Dodd-Frank compliance to evaluate how financial institutions would react to "severely adverse" conditions.

Even though the Federal Reserve does not consider negative rate scenario analysis as a forecast, there are recent examples of central banks (ECB, BOJ, Danish National Bank, Swedish National Bank, Swiss National Bank) implementing actual negative rate policies.  (re:Bankers vs. Mattresses)  Therefore, the precedent has been set and the negative rate experiment has already begun. 

What is the tipping point?  When do large companies actually create a treasury department?  TreaSolution's research on this topic indicates that corporations typically create stand-alone treasury departments at approximately the $250 million / year revenue range ( + / - $100 Million).  There are some exceptions for smaller, truly multinational organizations.  For organizations < $250 Million / year in revenue, the treasury management function is typically conducted by someone in the Controller's department. 

Generally, there is one main reason why an organization needs to create a stand-alone treasury department = cash management complexity.   At a certain point during an organization's revenue growth, it's cash management functionality outgrows the Controller's group.  The catalyst for this increase in cash management complexity may be due to organic growth, merger(s) and/or acquisition(s).  It is at this point that it become more secure & efficient for organizations to develop a new, stand-alone treasury department.

List below are five topics that should be taken into considering when developing a new treasury department:

What is the new treasury department going to be responsible for?   Specifically, what will be the treasury department's scope of operations?  An organization may want to document their business requirements when answering these various questions.   One approach is to start at a very high level business requirements then work your way down to more specific business requirements.  Listed below is one example of a high level to detailed level business requirement logic:

Multinational Operations (US & UK) --> Cash Forecasting --> FX Risk Management --> USD / GBP Hedging

This is a simple example that should be replicated for every function that will be incorporated in the new treasury department.   Once the new treasury department's scope of operations are determined, then an organization can review the department personnel, hierarchy, technology, policies, procedures and internal controls.

Hiring qualified treasury personnel (or providing sufficient treasury management professional development) is one of the most important factors that will determine your organization's overall treasury management success.   Treasury department personnel should be familiar with current treasury best practices and internal controls.   When creating a new treasury department it is important to have someone on the treasury team who is an experienced treasury practitioner who can implement secure processes that are simultaneously efficient.  Continuous treasury department training can help ensure that your treasury department is educated on the most current treasury best practices.

Most new treasury departments will utilized a combination of bank website and spreadsheets to manage treasury operations.   The main reason for this is primarily because most organizations develop a treasury department while cash management complexity is still reasonable.   As organization grows in revenue, cash management complexity will also grow.  

In some instances, organizations postpone the development of a treasury department (respective to the organization's annual revenue and cash management complexity.)   If a relatively large organization is creating a new treasury department then bank websites and spreadsheet may not be secure and efficient enough to facility treasury operations.  In these situations, organizations may want to consider the selection and implementation of a treasury workstation (treasury management system).

Let's discuss the general definitions of treasury policies and procedures.  Treasury policies are the rules by which the treasury department will operate.   Treasury procedures are the step-by-step instructions as to how each treasury process will be conducted.  The treasury procedures will operate within the rules dictated by the treasury policies.

The development of treasury policies should be a team effort.   The CFO (via Board of Director directives) can lead in the development and approval the overall policies for the treasury department.   Specific treasury policy feedback should be requested from various subject matter experts such as Legal, Internal Audit, Accounting, IT, Treasury Consultants, etc...

The development of treasury procedures is a more specific task.   In order to create a secure and efficient treasury process one must have a detailed understanding of internal control, business requirements, treasury best practices and treasury department capacity.  Generally, treasury department procedures will be draft by the corporate treasurer and submitted to both the CFO and Internal Audit for review / approval.  Once approved, treasury procedures should be reviewed annually to ensure that they are 1.) meeting business requirements, and 2.) utilizing current treasury best practices.

Treasury internal controls are of paramount importance.   Therefore, throughout the treasury department development process an organization should always consider treasury department internal controls.  Are internal controls incorporated into the new treasury policies?  Treasury procedures?  Are there sufficient separation of duties amongst treasury personnel?  Are there sufficient separation of responsibilities amongst departments?   These questions (and more!) should be address when creating a new treasury department. 

Ultimately, the overwhelmingly vast majority of large organization will create a treasury department at some point during their revenue growth story.  The best treasury department development strategy is to be proactive and not reactive.   Treasury department formations are more complex and challenging if an organization has sufficient cash management complexity yet delays the  development of a treasury department.   

Do you agree or disagree with this article?  Please feel free to use the comments to post your thoughts or questions.

Relevant TreaSolution Services:
Treasury Best Practices Review
Treasury Benchmarking Reports 
Treasury Department Development
Treasury Workstation Selection (RFP)
Treasury Workstation Implementation

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Renegotiating credit facilities is an important responsibilities for corporate treasurers and CFO's.   TreaSolution wanted to document what the churn rate was for credit facilities on an annualized basis.   As illustrated from the above chart, in 2013 almost 42% of treasury survey respondents indicated that they were going to renegotiate their credit facility.   This is a rather large percentage which, if consistent in subsequent years, indicates that credit facilities will be renegotiated on average every 2.38 years (i.e. 100% / 41.98%).  TreaSolution feels that the low interest rate environment and greater availability to credit may had led to an increase in credit facility renegotiations.

Do you agree or disagree with this data?  Please feel free to use the comments to post your thoughts or questions.

Relevant TreaSolution Services:
Treasury Benchmarking Reports
Treasury Best Practice Review
Treasury Intelligence Reports (FI's)

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