Liquidity management and the nature of financial change: the UK ALMA tackles the issues

Citation

Wright, A. (2001), "Liquidity management and the nature of financial change: the UK ALMA tackles the issues", Balance Sheet, Vol. 9 No. 1. https://doi.org/10.1108/bs.2001.26509aac.001

Liquidity management and the nature of financial change: the UK ALMA tackles the issues

Liquidity management and the nature of financial change: the UK ALMA tackles the issues

Keywords: Financial institutions, Change, Liquidity, Profitability, Asset management, Liability

The annual UK ALMA conference is characterised by a lively air of networking amongst members, interspersed with stimulating presentations and discussions. The gathering in January 2001 fitted the pattern well. It started with a lively post-dinner talk from Peter Gallant, the Group Treasurer of Barclays Bank, on the topic of "Living through financial change".

He pointed out that when he had joined Citibank back in 1974 it was a world where it could take all day to set up a phone call to Brazil. He reviewed his career in banking in a highly amusing fashion. But it was hard to resist the conclusion that life was going to continue to get harder in the future. As one ALMA member commented in discussions after the talk, banks survive at the moment because they are very profitable and so can ride out a crisis. In future, if banks are likely to be less profitable, then it is likely to be harder to survive.

Managing change and culture

This theme was taken up the following morning by Jeff Neagle and Adrian Spurrell of ASK Europe. Their thesis was on managing change in the financial services companies. They argued that people management practices are the key factor in productivity and profitability and that financial services organisations were going to need to pay more attention to what they saw as the new managerial challenge. This involved focusing resources more on customer needs than on the services which the organisation's structure demanded, while sustaining the energy levels of the organisation and its members.

They argued that employment patterns had changed. These days people are leaving large organisations in large numbers and it is the best people who are tending to leave, partly because of the amount of change going on and partly because they would like more stability. As the pace of change in financial services gets steeper and greater, they argued, a committed and productive workforce is part of the competitive advantage equation but the actions of organisations often run contrary to achieving this.

The psychological contract

At this point in an organisation's development what they saw as "the psychological contract" became important. This was the way in which employees perceived how they were being treated and then acted accordingly. If the psychological contract is felt to be unmet, then the employee reduces feelings of commitment and it may lead to what they described as "sabotage" behaviours.

The problem for financial service organisations is that change has itself changed the nature of this psychological contract with the employees. So motivation becomes the key. And this, in a world where mergers and acquisitions are the norm, is difficult. Out go stability of culture and a feeling of community and in come rewards for short-term performance. Trust is difficult to create and maintain, they suggested, and organisational cultures were notoriously slow to build up. But the advantages of creating and maintaining a positive organisational culture had to be the goal. Only this can provide "the uniqueness of an organisation", they suggested, and "its nature and intensity can result in competitive advantage".

Where does banking's future lie?

Then Rob Thomas, a director of UBS Warburg, stepped up to talk about the benefits of financial change. He called his talk "The future fragmentation of banking" and stressed that this was a process of re-engineering. He divided banking into three businesses: distribution, the back office, and the balance-sheet, or, to put it another way: origination, processing, and balance-sheet. He pointed out that the processing element was not really banking at all these days. It was an information technology business not a banking business. The old integrated market structure meant that no one was very sure of where the profitability in a bank properly came from. Outsiders in particular, he suggested, could have no idea of which part of the bank was the most profitable.

Instead he argued for a "disintegrated" market structure. This made the transparency of pricing and cost structure clearer. It isolated the sources of profitability within the value chain. It made capital efficiency into an issue because assets no longer had to be on the balance-sheet. And it underlined the concept of the "market value of a loan".

The key issues then became: where is shareholder value created and what should banks focus on? He looked at the banks' business and identified a long-term portfolio shift out of cash and into life assurance, pension funds and equities. This, he thought, would reduce banks' role as financial intermediaries. So the future did not lie with the back office, which would be outsourced, nor on their balance-sheet.

Retail portfolio managers

The bank of the future, he thought, would have a customer relationship without the balance-sheet. The banks would become retail portfolio managers and there would be a convergence of banking, life assurance, and brokerage industries.

The result of this would be that banks will increasingly take the strategic decision to specialise on part of the value chain where they possess comparative advantage and they will have to become more sophisticated in balance-sheet management. Securitisation would continue to provide diversity of balance-sheet risk.

On the other hand, in discussions after his presentation Thomas pointed out that the whole business was changing much more slowly than people had predicted. He pointed to the enthusiasm for e-banking which had been prevalent in the previous year but had turned out to be far from the violent and instant revolution which people had predicted.

Thomas was followed on to the podium by Alex Sell from the Banking Policy Unit of the regulatory body, the Financial Services Authority. He provided a short overview of the state of the regulatory process so far with an emphasis on liquidity management in the financial sector. He talked of how the FSA's new operating framework was likely to work and how the new Basel proposals on liquidity management were likely to work. And he concluded with views on the proper role for the regulator.

After that Bob Falconer of ABN AMRO Bank provided an international comparison of international bank liquidity ratios.

ALMA committee changes

At the ALMA annual general meeting, held at the conference, changes were made to the office-holders. Mike Walker of Prudential-Bache International Bank stood down as Chairman and was replaced by Joseph Mariathasan from Morley Fund Management.

ALMA sets up Web site

A Web site for UK ALMA has been set up which carries news, networking details, news of future courses, meetings and conferences and other useful information. It can be seen at www.uk-alma.co.uk.