INTERNATIONAL

Changes to cash management in Germany Chris Robinson of says that the arrival of the euro means more competition between banks to offer cash management services in Germany.

hanks to the competitive As a market within a market, pressures of economic and The advent Germany has developed its own inte- Tmonetary union (Emu), grated and standardised electronic banking relationships in Germany are of the euro will banking system known locally as facing significant changes. The chal- accelerate trends ‘MultiCash’. The system allows cus- lenge for treasurers in future is to make tomers a screen-based interface with the most of the opportunities that arise. already evident in banks and to benefit from home-grown Without doubt, the arrival of Emu Germany. At the software with the functionality to provide heralds the onset of a period of tailor-made cash management solu- unprecedented change as European same time, it will tions. This software has been sold on to structures and institutions open them- put an end to Austrian and Eastern European mar- selves fully to the competition inherent kets, making MultiCash an increasingly in a wider domestic market. As long- idiosyncratic local standardised electronic banking tool. standing practices give way to new, pricing subsidies Standing alongside MultiCash is the more efficient ones, the ultimate benefi- two-pronged clearing and settlement ciary of this dynamic upheaval will be and fee system. The Landeszentralbank (LZB) the customer. structures facilitates clearing across all regions. The advent of the euro will accelerate The system in is known as trends – such as the declining influence EAF-2 and encompasses more than 60 of hausbanks on corporate treasury – Past as prologue institutions. already evident in Germany. At the With 40% of the Deutschmark flows of Meanwhile, a similar service is pro- same time, it will impact local pricing the 11 ‘in’ countries directed to the vided countrywide through the Deutsche subsidies and fee structures. German clearing system, it is safe to Bundesbank – the German central bank assume that a high volume of euro – for more than 2,000 members. Competitive force flows will be directed to Frankfurt as EAF-2 allows the paperless exchange As a result there will be increased com- well. So, in order to understand the of Deutschmark (DM) credit transfers petition on both price and service for all ongoing changes in Germany and the between participants and limits credit market participants be they local or opportunities arising from the comple- risk by finalising offsetting payments. international as they try to create tion of the single market, it is worth Further, large commercial institutions economies of scale in a deeper briefly looking both at the state of local and savings banks operate a giro European market. treasury services and at the system for low-value payments. The competitive landscape in country’s Emu preparations. German companies still rely largely Germany, as with other European mar- on cheques, with clearing times for kets, will change. As a result opportuni- major corporates of about 1-2 days. ties abound for optimising cash man- Those periods are slightly longer for agement functions on a European scale. smaller companies and individuals. Treasurers are abandoning the prac- Germany is linked to TARGET, the tice of recycling foreign exchange and European high-value clearing network, instead are concentrating euro into by the ELS system – the country’s high- large and liquid pools that can be value clearing network and only true quickly applied – either inside or outside real-time gross settlement (RTGS) ‘euro-land’ – for maximum return. system. Thus, the critical challenge for corporate And the fact that Germany and users is to source services from banks Austria (along with Belgium) are the that can provide this type of global net- only countries to transform local work access and liquidity management clearing systems from national curren- capability – alongside traditional cy denominations solely to euro is a domestic payments and clearing – at a testament both to their integrity and to competitive price. Chris Robinson Germany’s commitment to Emu.

50 The Treasurer – January 1999 INTERNATIONAL Germany

Regulatory regime The German government has increased the pace with which it is modernising its regulatory regime. The 2% reserve requirement that banks must hold on interest-free deposit at the central bank was lifted in October, with the potential effect of adding five to six basis points to interest rates paid on corporate accounts. Indeed, all standard European money market instruments are available locally and there are no restrictions on non- resident bank accounts – although resi- dents holding off-shore accounts must report those balances monthly to the Bundesbank. Frankfurt – will the euro mean a growing role for the German financial centre? And while the country’s high level of cross-border transactions. As the single of companies, and German corporates withholding tax is seen as a drawback, currency takes hold, it will reinforce this are adept at concentrating their capital German banks have long offered zero transition. flows, having tended to repatriate off- balancing – a factor that makes Indeed, one of Emu’s primary goals is shore revenues as quickly as they are Frankfurt one of the more attractive to reduce the number of banking earned. And it is this concentration centres for euro concentration. charges and to make those charges model that potentially gives them an more transparent. Thus, as some corpo- advantage with the introduction of the Hurdles and opportunities rates renegotiate their local banking single currency. Despite its modern infrastructure and a relationships amid an environment of Most German banks can offer local modernising regulatory regime, increasing competition, traditional pric- concentration and zero-balancing – in Germany’s banking system remains ing practices will come under pressure. which an end-of-day transfer to a mas- affected by many practices befitting its The wider domestic market also ter account takes place. The top five heritage as a protected market. allows corporates to optimise their cash banks dominating the market, including The close relationships which banks management techniques through euro , Citibank, have long enjoyed with their corporate pooling. There are no local restrictions , Dresdner Bank and customers has bred a system by which on concentrating the accounts of groups Bayerische Vereinsbank all offer a vari- domestic transaction charges are kept ation of this service. artificially low thanks to subsidies from proportionally higher cross-border fees. Broader market Those penal charges can reach as high As cross-border Many banks cannot yet offer concen- as DM1.50 per DM1,000, with a maxi- impediments tration in centres around Europe, thus mum of DM5,000 for a single tying their customers to prevailing local high-value transaction. continue to break market conditions and potentially limit- The fact that most of these charges down, Germany’s ing their returns on pooled balances. are passed on to correspondent banks International banks with pan-european or corporate counterparties has only banks are under presence will have a competitive served to strengthen these relationships. increasing pressure advantage. Further, their regional net- Indeed, this practice allows corporate works offer customers the added bonus customers that conduct only a few cross- to change both of lower-cost clearing and settlement border transactions a year to source their practices and services on transactions within the their domestic clearing services virtually broader domestic market created by free. However, banks continue to cover their pricing. This, Emu. those costs by paying little in the way of in turn, is giving As cross-border impediments contin- interest on corporate deposits. ue to break down, historical banking What’s more, the widespread practice corporate customers practices will come under pressure to of adding or subtracting one day on the the chance to reform as corporates look to maximise delivery date of credit or debit instruc- the value they get from their banks. tions allows banks to collect significant review their Overall, the emphasis is on choice in float income that might otherwise go to banking this new competitive environment. And their customers. making the right choices is critical to Many corporates are likely to have relationships with maximising the benefits of the single several core domestic service providers, an eye to exacting currency. ■ preferring to maintain just one or two key relationships with international even greater value Chris Robinson is global solutions banks and using those institutions for manager at Citibank.

The Treasurer – January 1999 51