Treasurer's checklist when preparing for increased interest rates

The global economy has witnessed continuing interest rate hikes over recent months as central banks aim to curb inflation, which has largely been caused by the consequences of the pandemic, associated supply chain disruptions, and the ongoing conflict in Ukraine. In our recent blog we looked at the challenges for Treasurers in 2023 against this backdrop. Today we continue on that theme but with a focus on key considerations for investment decisions.

With base rates having risen above 4% in the past year in the UK and US and tightening monetary policy marking the end of the near-zero interest rate era, has the yield on your investments reacted in kind or is there now a too big to ignore opportunity cost for having not acted? Have you reviewed your credit risk policy in light of the challenging economic outlook and recent mini banking crisis?

Good governance is crucial to minimise excessive risk taking. A clear statement of investment objectives and risk appetite will serve as the foundation to guide your decision making. It sets the tone in the organisation by converting agreed principles into a set of guidelines that answer questions such as:

• What is your credit risk tolerance and diversification requirement, and how will your exposure be measured and monitored?
• Have you considered tactically diversifying into Money Market Funds or non-bank assets in light of recent events? Keep an eye out for our next blog where we will spotlight counterparty risk considerations with some key learnings from the recent fall of SVB, Signature Bank and Credit Suisse.
• How much capital can you put at risk and how much should be held in reserve as a liquidity buffer?
• What level of complexity of investment product should you be limited to investing in?
• How will your investment performance be evaluated?
• Which benchmarks could I compare against? 

• Is your company’s objective to maximise the value of your Bank Relationships? You may want to tactically shift your ‘wallet’ to influence outcomes.
• Is your company’s objective to build upon its ESG credentials? You’ll need to know how to identify and compare investment related ESG credentials whilst avoiding misleading ESG claims and Greenwashing.
• Is your counterparty network wide enough to be confident you are receiving competitive quotes and innovative products? You may want to increase your reach by accessing reputable intermediaries e.g., brokers, technology partners, and consultancies. 

• Understand the tax implications of your decisions.
• Analyse the Financial Reporting impacts of your investment by understanding the Balance Sheet Accounting classification, which can impact your KPI’s/Ratio’s/Covenants.
• Design and implement suitable technology solutions to maximise efficiency of the investment process e.g., TMS, dealing platform, confirmations matching platform, market data platform, and payments factory.
• Enforce good practise controls and compliance processes. Undertake a self-audit or use internal or external support to assess the effectiveness of your control environment.
• Tackle reinvestment risk by spreading the maturities of your investments. 

We offer a broad spectrum of Treasury services including supporting with:

• Diagnostic assessments to evaluate your treasury processes, governance, and technology against leading practise to identify opportunities for enhancement.
• Assistance developing or enhancing your treasury policies and strategy including Investment Policy and strategy to help you optimise your credit risk limits and monitoring processes.
• Design and implementation of in-house banking, payment factory, cash pooling, and netting structures to help you centralise cash to maximise investment yields or repay costly debt.
• Support with selection and implementation of Treasury technology to obtain a central view of liquidity, automate counterparty credit risk exposure reporting, and enforce dealing limits.
• Review and development of hedging strategies to achieve policy risk objectives, and associated accounting advice.
• Internal audit of the Treasury function to identify risks and suitability of controls so you can have confidence in your end to end dealing process.

If you would like to discuss potential solutions to these challenges, please do not hesitate to contact KPMG’s Corporate Treasury Services team.