What keeps a German treasurer responsible for billions of euros awake in the small hours? Not one too many cups of luxury Dallmayr coffee or the roar of Porsches on the autobahn. Stephan Theissing, global head of treasury for Allianz at the insurance giant’s Munich headquarters, says he “would not sleep well at night” if the system he runs weren’t highly centralized.
“In the continuing European banking crisis, you want to be up-to-date and have central control on a minute-by-minute basis of what your banking exposures are, because at any moment something can explode somewhere,” explains Theissing, whose firm has €500 billion ($651 billion) in global insurance assets under management.
For Allianz the solution is to pool its cash in one place. “If I want to pull the cash out of the next Lehman, I don’t have to make a lot of calls to different units,” Theissing says. “I can press the button in Munich immediately.”
Cash management specialists say more insurers and other big international companies have consolidated their treasury operations since the crash of 2008, with the euro zone’s recent troubles providing an extra push.
“The 2008 crisis has taught people they need to think about cash,” notes Carla Hoogweg, Amsterdam-based head of corporate treasury at ING Insurance, part of Dutch financial conglomerate ING Group. Like Allianz, ING Insurance centralized its treasury long before that event. The firm has €340 billion in assets, of which €5 billion is in cash, including balances held at central banks. “Managing cash through a centralized treasury function allows better monitoring of counterparty risk,” Hoogweg says.
Allianz offers an example of a rigorously unified system. At the end of each day, all the firm’s units must deposit their excess cash — that which is not needed immediately — into a single multicurrency account run by Theissing’s Munich team. Allianz invests this money primarily in liquid, highly rated short-term securities such as sovereign bonds. It also lends some through the repurchase, or repo, market, which allows financial institutions to borrow cash from one another in return for securities as collateral, or deposits it in the European Central Bank and commercial banks.
The next day Theissing’s team transfers cash back to each part of the group according to its needs. This central account fluctuates between €5 billion and €8 billion, with another €5 billion to €8 billion worth of short-term securities in Allianz’s investment portfolio.
Thomas Schickler, global head of liquidity at HSBC Holdings in Singapore, gives another reason for the wave of treasury unification since 2008. “In the long run, regulatory changes are likely to constrain banks’ balance-sheet capacity and thus increase the costs of borrowing,” he says. In a unified system overall borrowing is lower because the cash pooled in a central account can be lent to parts of the group that need it, Schickler adds; individual units don’t have to find money in the capital markets.
In addition to banks’ clamping down on credit, markets are demanding a higher risk premium for lending money. For five-year euro-denominated senior bonds, one treasurer says, spreads above risk-free benchmark rates that might have been 10 or 15 basis points before the crisis have swelled to about 50.
Steven Moore, treasurer at Toronto-based insurance and financial services firm Manulife Financial Corp., cites yet another advantage of consolidation: “A centralized treasury and liquidity pool allows our portfolio managers to be fully invested because they no longer have to worry about managing their cash position.” The alternative is a system that is decentralized, dysfunctional and inefficient, Moore says. At Manulife, whose global assets total C$230 billion ($224 billion), a single treasury team pools and manages about 90 percent of the firm’s North American cash.
A centralized treasury also means fewer staff. A big insurer may need only 150 people worldwide to run its cash management operation, rather than 200 in a decentralized system, says Lewis Warren, head of J.P. Morgan’s treasury services for North American financial institutions, based in New York.
New regulations that aim to make financial firms stronger will probably encourage rather than inhibit consolidation, insurance treasurers predict. The European Union’s forthcoming Solvency II rules, designed to force insurers to hold more capital, are still taking shape, with the latest draft due for publication in June. Allianz’s Theissing says liquidity risk management will play a big role in the new regulations. “The most efficient way of managing liquidity risk is through centralization,” he asserts.
If Theissing is right, cash managers won’t lose any shut-eye over the byzantine Solvency II proposals, which are sending even the experts to sleep.