CFOs will find borrowing more expensive

The coalition government, global regulators and the G20 are determined to tighten regulation of the world’s banks and although a laudable aim given the recent past, stricter regulation will undoubtedly impact on how chief financial officers manage their finances in an already uncertain economic climate.

The government says the current system of financial regulation is fundamentally flawed and in need of replacing with a structure that promotes responsible and sustainable banking, where regulators have greater powers to curb unsustainable lending practices and promote more competition within the banking sector.

In addition, ministers recognise that more needs to be done to protect taxpayers from financial malpractice and help the public manage their own debts. Britain's largest lenders could even be broken up after the government pledged to establish an independent commission to look into this possibility.

But for the CFO life has already become more complicated in recent months without adding another level of complexity to the mix. Tighter banking regulation will have a knock on effect, which will almost certainly result in CFOs being restricted as they seek to finance or refinance. It will become harder for them because banks will be holding onto more capital making it costlier to borrow.

The ultimate aim of UK reforms, Paul Tucker, deputy governor of the Bank of England in charge of financial stability, says is for banks that were previously seen as too big to fail, to be allowed to fail in the future without bringing down the entire system - a simple and logical objective that should be lauded.

Stuart Siddall, chief executive of the association of corporate treasurers (ACT) and former CFO of AMEC, Alpha Airports, Manweb and Balfour Beatty, says: “There are a variety of ways the reforms can pan out; there is no silver bullet. It is not just about bank capital - that did not stop the crisis.

“We need an orderly failure mechanism for banks. It is a good goal, as is avoiding bubbles and excesses. Bubbles are not seen as desirable in the media, but how do we manage those? That is the question. It is another laudable aim, but difficult for government and regulators to implement.”

Whatever the outcome is though something has to change. Clifford Smout, Deloitte’s regulation partner, says: “If we don’t react to this crisis and then the next crisis - whenever it arrives - looks like the first. Then the public will be totally unforgiving. Ultimately, the banks will now hold more capital, funding will be more secure and the way banks pay themselves will encourage caution, not risk.”

However, a satisfactory conclusion to the reforms still appears light-years away. Bruce Packard of banking analysts Seymour Pierce, says: “We have deep reservations about the ‘global universal banking’ strategy, due to government bailouts, since very little capacity has been removed from global financial services.”

Derivatives has become a dirty word, however the reality is that they are often used in the finance department’s day-to-day activities to reduce risk in underlying commercial activities. Although regulators don’t plan on eliminating the use of derivatives, they did propose that derivatives be traded via a clearing-house.

Such a move would have required finance teams to be subject to daily margining requirements. Clearly, this would impose a massive strain on corporate liquidity and the ACT among others, have lobbied hard to secure exemption from the need for non-financial companies to be subject to margining on derivatives.

For some organisations there will be exemptions of requisites to put derivatives through clearing exchange. The details aren’t clear yet, but this is certainly good news. But it will undoubtedly become more expensive, because risks will be more carefully considered and banks will be forced to hold more capital.