FD Report: Safe and sound – the importance of spreading your banking risk

Bank risk

The last few years have shaken many FDs’ faith in their key suppliers. While the downturn has threatened those relationships, no other supplier has come under more scrutiny than their banks. For many companies, it’s been a stark awakening: your bank can go down ­ and you can down with it.

It’s an issue the banks themselves acknowledge and have been at pains to highlight the efforts they have made to strengthen their balance sheets. Measures that were once only of interest to corporate treasurers are now at the forefront of clients’ minds when choosing their banks. But the fact remains that banking services haven’t improved and despite the imprecations of Gordon Brown and others, rate cuts haven’t been passed on to corporate borrowers.

“Everyone has had to review their risk management,” says Keith Strachan, director in the corporate treasury consulting practice at Deloitte. “Whether it’s placing funds or relying on banks operationally, the last few years have really changed that. The idea that a bank could go under was simply not in their thinking. Now it is and it’s real and you’re not prepared to gamble your company’s existence on a bank’s survival.”

While the banks retrench and set about recuperating, we are seeing a recalibration of the way in which large corporates deal with their banking arrangements, what they expect and how they mitigate the risks inherent in the current banking model. Changes are afoot and adapting to the new model of banking is one of the top challenges facing FDs today.

Spread the risk
That means spreading the risk. Ensuring a prudent spread of banks was previously considered the exclusive preserve of multinationals. But more businesses are now weighing up their options as the banks rebalance their portfolios. “In general, corporates are refocusing business on those who are lending them money,” says Strachan. “And in some cases where refinancing is necessary, some banks have pulled out. We’ve seen some overseas banks pulling out and that has caused the corporate to review the sort of business it gives to that bank.”

Further evidence, then, that the traditional model has changed. Now it’s banks that are forced to look at how they access capital. And balance is key. “Some corporates might have two global banks to help them with the global cash management structure and they’re questioning whether having one or two banks to do their disbursements makes them too reliant on a small number of banks,” says Strachan. “What if it gets into difficulty? That means they’ll have to put in place a back-up bank.”

Further down the food chain, the landscape is slightly different. Smaller and mid-market firms are a long way from being in a position to operate independently of banks’ systems, so those relationships remain fixed. But for many, the coming 12 months will see such a reappraising of priorities.

“There has been a significant change in the dynamic,” says Donald Stewart, partner at Faegre and in his spare time, chairman of the Quoted Companies Alliance (QCA). “People are now aware of counterparty risk and FDs realise having your money in the bank is no longer just ‘money in the bank’.”

Stewart believes the mid-market now includes many businesses that are looking beyond traditional sources of bank finance. “People who are trying to raise finance for everyday corporate activity are having to go further afield and be more creative or daring in their choice of banks than they were before,” he says, “because the few banks that are lending are foreign ­ Svenksa, for example. Anecdotally, the banks that are seen as a safe bet are Scandinavian and to a lesser extent, Spanish, because the traditional high street banks simply are not lending.”