It's a quandary bankers have found themselves in since disintermediation began to transform the financial services business: How do you meet the demands of corporations for high-yielding, liquid investments without sacrificing control of the deposit relationship?
For many bankers, the only solution to this dilemma has been to ally with securities firms.
But typically, these relationships have meant losing control of the assets, because once the investment order is placed the brokerage partner takes possession of the funds. In essence, these banks serve as fronts for the brokerage houses, and that's a difficult situation for any competitive banker to accept.
Enter Swiss Bank Corp., the New York affiliate of the 124-year-old Basel-based banking giant. Drawing upon the expertise of former securities industry executives and its accumulated experience handling customer investments, Swiss Bank has developed an automated investment product that executives say can help regional cash management banks meet the short-term investment needs of middle-market corporate and institutional investors.
SwissGold, as the Swiss Bank product is called, provides an automated approach to investing the derivative financial products known as repurchase agreements. SwissGold is designed for banks that might not otherwise have access to the "repo" markets. And in the process, it helps recapture assets that have been - or are - at risk of being siphoned from the banking system.
"We've developed a way for these banks to compete with money funds and other banks, while offering a high degree of safety and daily liquidity," explained John Perini, director of the Swiss Bank department that markets SwissGold. Perini, a veteran of the securities business, first developed an automated repo product for Merrill Lynch in 1988. SwissGold builds upon the expertise Mr. Perini amassed while running Merrill Lynch's repo desk, as well as the delivery systems expertise of Brian Carty, the department's associate director and a 30-year banking veteran who worked briefly with Mr. Perini at Merrill Lynch.
The repo business can be likened to that of a securities pawn shop. An investor agrees to buy securities for a specified sum of money from a dealer while simultaneously agreeing to sell those instruments back to that dealer on a specific date for a specified higher price. Typically, the securities involved in these transactions are U.S. Treasury or government agency securities, but banker's acceptances, certificates of deposits, commercial paper, and other marketable instruments also can be bought and sold in the repo market. What makes a repo attractive to the corporate investor is the short-term nature of the investment. By investing excess cash in an overnight repo, for example, the corporate investment officer can earn market rates of return and still be assured of the liquidity needed to support daily cash flows.
Historically, however, repos held appeal for only the most sophisticated investors, and only the most sophisticated cash management banks endeavored to offer repos. Swiss Bank hopes to change that by automating the repo process and offering it as a service, enabling other banks to private-label the program. Just over a year into the process, Swiss Bank already has sold two major regional banks on SwissGold, Barnett Banks Inc. and Fleet Bank.
Perini said he's optimistic that others will follow.
"We're giving these banks probably the safest investment product they can find," explained Mr. Perini.
The safety of the investment hinges on several factors: the underlying investments (mostly U.S. government securities); the knowledge that Swiss Bank, which actually brokers the transactions, is a well-capitalized bank ($14 billion in capital) with a AA-plus credit rating; the collateralization technique (each repo is collateralized at 110% of the dollar amount invested, and each investment is segregated, not pooled); and the fact that Chemical Bank, a well-known and respected bank, serves as custodian, taking physical delivery of the securities used to collateralize each repo transaction. "The safety of this thing is enormous," said Mr. Perini.
Any company with $100,000 or more in working capital to invest can use a private-label version of SwissGold, according to Perini, with little effort on the part of its bank. That should heighten the appeal for most middle- market firms, and even some smaller firms. "You talk to any corporate cash manager and he'll tell you the biggest weakness any bank has is the lack of investment instruments to match other cash management products," said Mr. Carty. SwissGold helps banks overcome this weakness, he suggested, without the need for any up-front capital.
Even better, explained Perini, the arrangement allows bankers to rid their balance sheets of low-yielding assets - demand deposit account balances - in return for a new source of fee income. And when loan demand starts picking up, and the bank needs access to cash, the money is well within reach, he said.
Not all bankers are driven to SwissGold by balance sheet concerns, however. Dan Nichols, manager of business investment services at Barnett Banks, Jacksonville, said he's most interested in meeting customer investment needs. "We're out there with a menu of different investment products," explained Mr. Nichols. SwissGold, which Barnett sells under the Repo Plus private label, is one product that meets one particular market need: risk-averse customers who want high-yielding investments.
For many customers, like local government agencies, Mr. Nichols noted, high-yielding but relatively risky investments like money market funds are off-limits. A collateralized repo agreement, he said, often satisfies the desire of these customers for good yields without running afoul of internal strictures. "What we're trying to do is capture the broad risk-return requirements demanded by our customers," said Mr. Nichols.
Having a repo product also helps cushion Barnett and its investment customers from the vagaries of interest rate swings, suggested Mr. Nichols. As market rates move up or down, he said, customers can move their investments between money market funds and repos without every having to leave Barnett.
In addition to Repo Plus, Barnett offers customers the option of investing in money market mutual funds, an array of fixed income securities (like government securities, Euro CDs, and collateralized mortgage securities), and hedging products. The bank achieves scale economies, Mr. Nichols explained, by delivering all these products, as well as traditional cash management products, through the same relationship management channel.
"My primary concern is selling needs-based products," he said.
While some banks might look to repos as a way to retain corporate customers, Barnett actually has been able to attract new customers with Repo Plus. "I went out and found customers who had a need for this product," Mr. Nichols said.
According to Dick Poje, a partner with Treasury Strategies Inc., Chicago, there's a good deal of money to be attracted by banks that can offer leading-edge investment products. Mr. Poje said research by Treasury Strategies suggests that for every dollar a corporation places in deposit instruments with a bank, $2,200 is left outside the banking system. "This is definitely a way to bring money back into the system," Mr. Poje said of repos.
Mr. Poje said banks that already are selling cash management products can easily expand that relationship. Customers will often consider an automated investment product that requires little in the way of active management on the part of the corporate investor, even if the yield is slightly less than what a brokerage might offer. "If you can provide enough convenience, yield will take a back seat," he said.
With SwissGold, both the investor and the bank benefit from convenience, Mr. Carty said. A corporate investment officer wishing to enter into an overnight repo agreement simply calls the company's bank to request the transaction, and everything else is handled on-line by the bank through Swiss Bank - the initiation, the collateralization, record keeping, and reporting. It's a matter of leveraging economies of scale. Given the design of the product, and given Swiss Bank's expertise in the repo business, Mr. Carty said the bank can handle billions of dollars worth of transactions while incurring very little in the way of operating overhead.
Mr. Nichols said he was attracted to Swiss Bank and its SwissGold product in part because of the convenience and technology the bank offered, but also because of the bank's credit rating and the fact that it did not compete directly with Barnett.
Mr. Perini believes Swiss Bank's own repo market activities serve the bank well as it attempts to market SwissGold. Although the bank operates a large repo desk, its customers are not middle-market firms but big corporate investors with huge sums of capital and staffs dedicated to their repo activities.
"Our strategy is to deliver this product through regional banks. They have the relationships with the end users, we don't," explained Mr. Perini. "They can make money private-labeling our product without losing control of the client relationship."
More to the point, a product like SwissGold can help Swiss Bank cement longer-term relationships with U.S. regional banks. "When you offer a product like this you're really forging a deeper client relationship. This is really a partnership," said Mr. Perini of his bank's relationship with banks like Barnett. "There are many other products we could or should be selling to these banks." And SwissGold, he said, lays the groundwork for deepening that bond.
Patricia A. Murphy is a regular contributor to Management Strategies.