Major international companies are looking to (further) centralize their regional treasuries in a single location.

Interview of F. Masquelier, Chair of ATEL on Treasury Centers (Luxembourg For Finance (LFF) – 26 April 2024)

What are the advantages of such centralization, for example at European level?

Treasury is clearly one of the best departments and the best operations to be centralized for efficiency, cost, and visibility reasons (among others). It enables to offset positions (short and long), to reduce net exposures, to concentrate expertise in one location, to free time for analysis and strategic tasks and eventually to reinforce internal controls. Treasury since last financial crises, e.g. GFC, covid, bank default Spring, etc.. has become the most important guardian of the company’s finance and of its liquidity. It is the guardian and protector against all financial risks. I used to call him/her the Chief Financial Risks Officer of the company, the number two of finance, the right arm of the CFO and the bodyguard of the financial health of MNC’s. A company can present negative results for years. Accounting doesn’t matter that much (up to a certain minimum level). Nevertheless, being in default of paying can make it bust and drive to bankruptcy or chapter 11, at least. Treasurers are key to preserve this liquidity and to face financial obligations and needs.

What are the arguments that drive them to set up in one country rather than another?

Historically, it was tax and fiscal environment, as first criterion. However, it is less and less a key differentiator. It is only a part of the equation when it comes to select a location for a European Treasury Center. ?At the end of the day, it is an addition of “plus” and “minus” that gives you a total. It depends on what are the key criteria for your company. It may differ from MNC to MNC. The staffing and expertise is key, the languages spoken, the cultural diversity, among others are key to select a country. And on this side, Luxembourg offers a lot of interesting specificities and strengths.

Does Luxembourg have a strong case to make for attracting multinational cash centers?

Yes, I do believe it has a very interesting business case to offer. For example, we have a solid and longstanding triple A rating, sign of stability, solidity, wealth, and resilience. It is at the heart and center of Europe, in the EU zone, in the EU and very “European”. These mindsets and the efficient administration make Luxembourg attractive and competitive.

What does a treasury center need from a bank to support its day-to-day activities? First it needs a good bank relationship manager, understanding its needs, businesses, and situation. It remains a human job. Then it needs a solid (global) network, with multi-solutions and innovation as a key priority. Ideally, we need local presence, and it is the case. Luxembourg for a small country is well-served and equipped in terms of commercial banks. For me innovative features, innovative mindset are key for bankers to proper serve clients. When a bank like BGL propose Emasphere or KANTOX, they are innovative and differentiate their offers. It is a way to personalize services that are becoming commodities. Technology is an essential element to push further and higher. However, lots of banks are victims of their heavy IT systems and IT legacy.

Technological innovation is very important in the treasury business. How can banks and treasury centers coordinate these innovations? Technologies are important for both sides, sell and buy-sides. No doubt about this. However, to make things moving, treasurers should not only complain but they should also participate to solutions via co-creation with bankers and fintech’s. It is not yet incorporated in behaviors, but it comes. Some leading banks, such as BNPP, JPMorgan, HSBC, BofA, … try to find and develop solutions. The most recent area where we are looking for solutions is AI. There are many opportunities to be identified and then developed. We are simply at the early days and infancy of AI applied to corporate treasury. It already works for CFF, payment fraud detection, prevention, trade finance, creditworthiness of debtors, etc…

Do banks develop digital tools for treasury centers in the same way as they do for retail customers? They do not develop solutions. They should but they don’t. I guess this situation may change soon and that the bank of the future will be more digital, will offer digital solutions via a multi-product platform, like an app store for treasurers. Paradoxically and for security and complexity reasons, retail customers are better served than corporate customers. It is explained by the requirements in terms of security, compliance, demands, etc.. It is why I do believe the bank of the future will have to develop much more solutions for corporates, including services and products, with less financial or banking features.

A cash center needs to be able to invest its short-term cash with a certain return. Does the Luxembourg financial center offer interesting solutions to meet this requirement?

An In-House Bank, as we name them, may have excess cash and liquidities to place on short and medium terms. The idea is to extract yield while mitigating counterparty risks and while diversifying investments. Luxembourg is not better the neighbor countries. Today, we can invest from everywhere in EU and in whatever type of products, especially via platforms. However, Luxembourg hosts lots of MMF’s and Clearstream is located here too. It makes Luxemburg, with lots of experts an interesting financial place for ST investments. The eco-system of Luxembourg remains unique in Europe, with lots of different expertise, skilled people, from everywhere in the world. We have a solid corporate landscape of MNC’s, we are leaders in alternative funds, family offices and funds in general. We therefore gather a lot of experts in different fields that makes the environment rather unique and highly professional.

Some major investment funds have also developed their own cash centers. Is the expertise of the Luxembourg ecosystem in investment funds an advantage when it comes to setting up these treasury centers in Luxembourg? Yes, our treasury expertise may help as the MNC’s remain the leading edge in treasury management. The funds could certainly be inspired by corporates and apply best practices in treasury. The great, diversified, skilled and well-served eco-system, with a powerful treasury association, may help entities to better manage cash and liquidities.

What are the main consequences of interest rates on the activity of treasury centers? How have you had to adapt to the transition from negative rates to current rates?

They have huge consequences (positive and negative depending on our short or long positions). In any case, positive IRs are good news. The speed and jump in rates were surprising. Cost of funding has been quadrupled or more in couple of months. The key question remains to face the service of the debt, to secure financing, when diversification has never been pushed. The bank funding remains key in EU and we, corporates, do believe EUC should push further CMU project. This huge and fast growth of IRs is also an issue for States. It is worrying. The idea is to diversify to protect the companies.

How to convince young talents to join treasury jobs?

It is as for any other job today to attract talent to treasury. It is an incredibly exciting job but often underestimated, undervalued, not fully understood and therefore less sexy than others. However, it is important for treasury associations and corporations to get it better known from students and young talents to attract them, to retain them and educate them properly. Association of Corporate Treasurers across Europe promote the profession in Universities, at job fairs, in welcoming students to visit companies and to talk to practitioners. It is a key future challenge, as well as hiring new skills, including IT skills more and more required.

Disclaimer: This article was prepared by Fran?ois Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).