Page 88 - DMGT303_BANKING_AND_INSURANCE

Unit 4: Treasury Management & Banking Sector Reforms

14. Banks should now have a keen awareness of the need to identify, measure, monitor and Notes
control credit risk as well as to determine that they hold adequate capital against these
risks and that they are adequately ............................. for risks incurred.

Case Study Cash Management in a Credit Crisis

by Helen Sanders, Editor
Every treasurer has been forced to review how they manage their cash and liquidity since
the crisis first struck. In this case study, we use a real-life example of a global insurance
company and explore how treasury has dealt with the changing marketplace.

Cash management background
As an insurance company, the firm has substantial operational cash flow together with
fiduciary money owed to insurance carriers. With such high cash balances managed by the
company but owed to third parties, the financial and reputational risk of counterparty
default is huge. Cash management and short-term investment is a priority for treasury,
and principle preservation is the primary investment objective.
With many of the banks experiencing a downgrade in credit rating, treasury is increasingly
finding that it needs to spread its bank exposure risk. This is easy to do for short-term
investment activity such as deposits, but it becomes more difficult when it comes to cash
management. Corporates need to make decisions about the banks they want to work with
based on those that are most likely to be around in the future. Like many other firms, the
company has needed to focus carefully on where to place the company's cash. Even in
situations when a national government has stepped in to support a bank, and not every
bank can be bailed out, it could easily take three to four months to retrieve the cash,
creating potentially serious liquidity problems, FX risk and a loss of return over this
period. A company in this position may have to borrow to cover the liquidity gap or lose
out on business investment opportunities.
Short-term investments

Treasury has considered government securities as investment vehicles; however, these
are typically only issued in three currencies which normally create the fewest difficulties.
It uses money market funds (MMFs) in Latin America, Europe and the United States. It is
important to be familiar with the investment portfolio in each fund, so treasury receives
regular updates on fund assets and reviews both individual holdings and asset classes to
ensure that there is nothing of concern and that decisions comply with internal investment
policies.
Challenges remain in Latin America and Asia, where there are fewer repositories for local
currencies. Treasury is looking at money market funds in Asia in recognition of the
benefits of a diversified, high quality investment product, but this involves seeking
regulatory approval to place client money in these funds. The same issues apply to Middle
East and Africa, and treasury is working to address these needs as well.
Implementing notional cash pooling
Cash pooling has been a significant way in which the company has leveraged its group
cash position both before and during the current crisis. The company has had in-country

Contd....

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