| Risk management: corporate focus in years ahead |
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| The transactional risks associated with the entry of the euro and the events of last September 11th have highlighted the importance of managing political and economic risk says Declan O'Neill and this will be the biggest concern for treasurers in the coming years. |
The landscape of financial markets has changed radically over the past 15 years. Key economic concerns in Ireland in 1987 were a protracted recession, the worst since the 1930’s persistently high unemployment and the emigration of some of Ireland’s brightest young people. There was no Celtic Tiger, no IFSC, no euro and the outlook was one of pessimism. Spearheaded by an incisive Government in the late 1980s, their success in stimulating the economy, attracting businesses to locate here, establishing the IFSC, introducing a highly competitive corporation tax rate and finally bringing prosperity and a return of many of our emigrants, is well documented. The positive economic climate that evolved has brought new challenges. Our main concerns now are the cost of recruiting and retaining good staff, increased market competition, the stability of the new euro currency and the inflationary cost of doing business today.
Despite obvious economic prosperity, business conditions are increasingly competitive for the financial services industry and financial markets in particular. With an increasing number of players both domiciled in Ireland and located abroad, the customer has a greater choice than ever in accessing commoditised foreign exchange and interest rate products. As a successful long-term player in this market, we constantly look for ways to add value to the service we provide to our corporate customers. Fifteen years ago, most customers had a basic requirement for commoditised pricing of their FX or interest rate contracts. Their needs have changed, the business world they operate in is now more sophisticated. A major priority for our customers is to get the risk balance right, and this can have a significant impact on their bottom line profit. As a premier treasury services provider, our role now is to ensure that we meet the needs of these businesses, bring new and innovative ideas to their attention and to constantly exceed expectations.
The transition to euro was very smooth. We moved from the Irish pound, considered a peripheral currency with little liquidity in global terms, into the euro which opened up a cauldron of new and more liquid markets. This in turn triggered the demand by Irish and overseas corporates for cost effective and innovative structured hedging solutions. The challenge for financial institutions in Ireland is the delivery to our customers to provide them with cutting edge structured foreign exchange and interest rate hedging solutions. One significant change that we have seen since the advent of the euro is the broadening of our market beyond Irish shores. Many of our customers are pan European multi-nationals and not only do we deal with the Irish subsidiary, but we also provide treasury solutions on a pan European basis. This is a confirmation of the competitiveness and sophistication of Irish financial institutions in providing euro treasury products and a further acknowledgement of the reputation of this country’s business capability.
From a personal perspective, one of the major milestones for us was our change of ownership in late 1999.
We have seen far greater competition in the financial markets arena and particularly more entrants coming into the delivery of commoditised treasury products. Much of this competition arises from the commoditisation of plain vanilla foreign exchange and it’s delivery through electronic delivery channels. A company can now quite easily access foreign exchange pricing and execute a deal via the internet - either through single or multi-bank portals. However, where customers seek solutions to manage risk then it is the added value, solutions-oriented financial markets services provider, that dominates the market in the current environment and will do so going forward.
In the new millennium, a major concern for our customers is risk management. The euro certainly brought with it a level of transactional risk and this is ongoing. Compounding this, the uncertainty created by the horrific terrorist attacks in the US last year and subsequent events, brought home to most businesses the importance of identifying and managing economic and political risk. Dealing with this type of risk is complex and difficult to quantify.
Looking to the future, companies will increasingly set risk management frameworks in their corporate governance structure. In addition, a clear treasury policy is critical, formulated in conjunction with the treasury provider, documenting the company’s appetite for risk and the implementation of the overall risk policy. Our role as financial markets consultants will be more prescriptive, reviewing the dynamics of the business, generating alternative courses of action and suggesting the ones most appropriate to the business. E-commerce while important will remain focused on the delivery of vanilla products. Service and the ability to provide realistic solutions will continue to be the key critical determinant for companies in choosing a treasury provider. |
Declan O’Neill is head of Ulster Bank Financial Markets.
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| Article appeared in the June 2002 issue.
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