FD Report: Do-it-yourself banking

Those former masters of the universe, the global bankers who brought the world’s financial system to its knees, now have a new problem to contend with. Since the credit crunch started, more corporates have started to set up their own in-house banks.

At this stage, no one is pretending they will supplant Barclays, Société Générale or Deutsche Bank, but they will change the way banks work with corporates and ­ what’s especially important for FDs ­ the way corporates handle many of their treasury functions and, potentially, their commercial payment activities.

E-on, the energy company, is just one of a growing list that have been moving towards in-house banking. “It’s delivered more efficient cash management in the company,” says Rainer Heynck, who runs the in-house bank’s back-office. “Before, we had different databases, but now we have only one.”

In an age of uncertainty, the ability to see what’s happening to cash throughout a diverse business empire is a major benefit. “What I can do, which I couldn’t before, is see the in-house balances of every company. I can see those that might have cash surpluses and those that need credit.”

E-on has set up in-house banking centres in Germany, Sweden and the US. The German operation, where Heynck works, handles the banking for around 80 European entities. At the moment, the main activity is oversight and reconciliation of cash balances among the entities. In the future, the in-house banking team at E.on, which includes Jöerg Bädermann in the front office and Torsten Spieker, the project manager, are planning that all payments between E.on companies will pass through the in-house bank rather than external banks.

“Since the beginning of the credit crunch and the subsequent reduction in available liquidity in the market, we’ve experienced an increase in demand for advanced cash management solutions, including in-house banking,” says Larry Ng, managing director of corporate development for Wall Street Systems, the company which provides the software that powers E.on’s in-house bank.

“While the state of the economy has reduced the overall demand for treasury systems, we have seen cash management requirements taking precedence over treasury and risk management requirements in many cases,” Ng adds.

Banking on FDs
In-house banking ought to be on more FDs’ agendas, argues David Stebbings, head of treasury advisory at PricewaterhouseCoopers UK. He’s fresh back from Amsterdam where he has been advising a Middle Eastern oil company setting up its in-house bank.

Its main purpose in doing so was to create a “payments factory” to process outgoings and receipts for all its companies.

“There are efficiency and cost savings,” says Stebbings. “But there’s also much better control ­ you can see the payments going out from the business more clearly.”

Stebbings sees in-house banks working at two levels. The first is where the company sets up its treasury function as an in-house bank. “An in-house bank effectively centralises all the risk and manages that risk out of one place,” says Stebbings.

By way of example, take the case of a subsidiary company that wants to do a foreign exchange deal. It could handle the deal itself, but if the subsidiary is a small one, it might lack the kind of FX experience and bargaining power that will enable it to get the best result.

Instead, the subsidiary does its deal with the in-house bank. The in-house bank completes the transaction in the markets. By aggregating bids from other subsidiaries, it may be able to strike a better overall deal than a number of subsidiaries could do individually. Certainly, the higher level of dealflow makes it more likely deals will be handled by a trader who is more experienced.

Or take the case of one subsidiary selling euros to hedge a long position. Perhaps there is a another subsidiary elsewhere buying euros to hedge a short position. An in-house bank may have the ability to offset those trades without going to the market.

Payment factory
Stebbings sees the centralisation of treasury functions as the first level of an in-house bank. The second level is to set up an in-house payments factory, such as the Amsterdam operation ­ “but that’s a more complex operation,” he says. Much depends on what systems are already in place.