Among recent innovations in financial management, the concept of the corporate bank ranks high for a number of prominent companies that have changed their attitude toward finance from basically reactive to decidedly proactive. The corporate bank has altered the status of their finance teams from largely staff to nearly line and has facilitated a new and dynamic approach to managing financial assets, liabilities, and risk — one that actively strives to contribute to overall corporate performance.
But all managers do not understand the concept of the corporate bank. Some are deeply suspicious of active financial management, believing it to be the sure road to massive loss — a belief sustained by publicity about those that have failed. But these accounts, while newsworthy, represent only the rare and preventable exceptions. They should not be allowed to obscure a corporate bank’s purpose and its potential contributions.
What gave rise to the corporate bank? What exactly is it? What are its basic functions? What is its role in financial policy? How does it work with operating divisions? How should its performance be assessed? How is it controlled? What are the tradeoffs and costs in setting it up? These are the main questions I address in this article.
Growth of the Corporate Bank
The concept of the corporate bank has its roots in the late 1960s when the French automobile group, Renault, set up a finance subsidiary in Lausanne, primarily to avoid exchange controls. But the real impetus came with the floating of exchange rates in the early 1970s. Financial exposure began to take on real significance as currencies bobbed up and down unpredictably from one quarter to the next, giving rise to large, unexpected losses. Management, directors, and shareholders started to demand that exposure be better controlled and managed.
Most multinationals responded by organizing so that they could at least identify and forecast exposures on a consolidated basis. Some, like Chrysler, adopted a policy of centrally hedging all their exposures in the forward market. Others took a more decentralized approach and left this decision to each region or subsidiary, while a few saw floating as a golden opportunity to make money.
The opportunists invariably got burned. As for the others, their efforts can be described as quite modest, carried out for the most part by self-taught staff people who devoted only a small amount of time to the job.