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Treasury & Capital Markets
In-house bank: How to mitigate counterparty risk
Treasury centres in Asia may well consider establishing an in-house bank (IHB) not only as a way to centralize their cash in one location, but also as a safeguard against banking risk.
Darryl Yu 25 Aug 2016
Treasury centres in Asia may well consider establishing an in-house bank (IHB) not only as a way to centralize their cash in one location, but also as a safeguard against banking risk.
The Asset Benchmark Research survey of over a thousand Asia-Pacific (APAC) CFO/treasurers discovered that only 24% of participants had an IHB up and running. “If you want to be really efficient you have to set up an in-house bank, which allows the centralization of cash, risk management and processes,” explains Michael Sack, head of treasury & financing at hearing aid manufacturer Sivantos. “I am looking for solutions that the banks are comfortable working with so that means its industry overarching but bank independent [multi-bank approach].”
For Sack, going through the global financial in 2007-08 got him rethinking his approach when interacting with banks. “The global financial crisis has shown me that banks might disappear or lines and regional presence might be cut. It’s not like they will go bankrupt but they might pull out their support for me,” he explains.   
According to Asset Benchmark Research, CFOs/treasurers in Asia-Pacific (APAC) consider counterparty risk as a top five concern when running their treasury operations. This comes as no surprise considering financial institutions such as banks have been put under pressure to comply with numerous financial regulations. Taiwanese Mega Bank for example last week was fined US$180 million by the New York state financial regulator as a result of violating anti-money laundering violations.  
Currently Sivantos uses Swift-for-Corporates system, which now allows the company to consolidate its banking connectivity. “Our treasury management system is bank-independent. It’s connected to Swift so that means we can address all the banks in the world,” says Sack. “That doesn’t mean that I don’t want to work closely with my banker. I have two to three key banking relationships. But I don’t want to put my entire infrastructure into the hands of one bank.”
While the IHB was beneficial for Sivantos’ in reducing counterparty risk, Sack admits that not all treasury departments have the backing to change their internal processes.
“You need a top management buy-in, because resources and infrastructure investments might be required to connect into the ERP and IT-landscape and the kind of chain-of-command to really enforce these principles across participating companies,” says Sack.
“Centralization allows automation and standardization that are a benefit to everyone. You need a standardized IT landscape to be fully effective and reap the most benefits,” he adds.
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