Money
Issue No. 16 - April/May 2004
Business Banking Evolution
by Penelope Herbert
While Australian banks were once a source of standard business or housing loans, most full service financial institutions also offer a full range of trade and financial markets services.
Many of these services are available online allowing the latest foreign exchange rates to be checked, telegraphic transfers with spot or forward rates to be arranged, letters of credit requests to be processed and foreign exchange accounts to be accessed. This includes standard transactions and their histories.
There is one service in particular that highlights the impact of this new style of business banking – debt management.
In the past, businesses had two basic choices for business debt funding – fixed rate or floating interest rate agreements. While these are still very much in use and extremely effective, they have evolved.
During the high interest rate environments of the late 1980s and 1990s, the practice of holding floating rate funding and “capping" a worst case scenario became popular. This provided businesses with insurance against spikes in interest rates, and enabled them to benefit from the lower cost of funding if interest rates fell over time.
Progressively, the simple cap has been varied and modified into flexible market risk management products to suit individual business requirements. As the demands and requests of Australian businesses evolve, the products have changed continually to meet this demand.
Variables, such as cash—...
