Bank resiliency, key treasury priority (part 3)

Bank resiliency, key treasury priority

The awakening of bank counterparty risk was painful, but ultimately mild, in terms of its impact on treasurers. Nevertheless, every crisis is an opportunity to revisit internal processes and ask the right questions, even if counterparty management remains complicated. At a time when treasurers are seeking to reduce the number of banking partners and accounts, it is useful to ask the right questions to make the right choices. It's essential to ensure the resilience of your bankers, in the interests of your business. Let's ask ourselves what's important to consider when reviewing banking partners. 

PART 3

Bank resiliency, a key target

The fall of the famous tech bank SVB has highlighted the importance of bank resiliency. Some finance professionals would claim “once again”. Corporate Treasurers need to have access to reliable financial services during times of crisis. As a necessary response, some treasurers are re-exploring their principle for a fair wallet sharing, or the practice of using multiple banks to manage their financial needs. A good and comprehensive approach can improve resiliency by diversifying risks and ensuring access to financial services, even if one bank experiences disruptions. Treasurers must apply the best practices in bank relationships and bank partner selection. What may differ today is the role technology can play to help treasurers better assessing their partners and mitigating their risks of counterparty.

Impact of the banking turmoil of March 2023 on banking relationships

Clearly, the recent banking crisis has raised awareness and alerted treasurers and CFOs to a risk that we tend to forget. With each financial crisis, whether small or large, regulators could try to correct what went wrong, and treasurers to become even more cautious, reinforcing their lines of defense and being stricter about the resilience of their bankers. Means are limited for analyzing counterparty risk, and often too slow to detect a problem given the speed of information transmission, which today is such that a weekend is enough to kill a major bank. What we have experienced is not new, but the speed of contagion is phenomenal. This makes the continuous analysis of counterparty risk even more delicate. On the other hand, every crisis is an opportunity to revisit principles, policies, and procedures to make the pool of banks more resilient. We cannot be sure that this year's banking turmoil was an isolated tremor and not the prelude to another global financial crisis. The worst is never certain, as the old saying goes, and that's true when it comes to banking.

Best practices for treasurers assessing potential bank relationships and risks

One might think that selecting only the global banks and the biggest players would be enough to avoid or limit counterparty risk. However, it's not always easy to avoid local banks, which are the company's long-standing and long-term partners. The composition of a banking group is complex, as it is often a piecemeal construction that is inherited and regularly modified by acquisitions. Credit needs must also be considered, as must the syndicates or club deals that make up the core bank group. In principle, the choice should be made based on services offered, prices and geographical footprint. The treasurer must be multi-banked and avoid over-concentration (as well as an excess of bankers, which is not very efficient). He must become bank agnostic and be ready to change quickly, even if the aim is to perpetuate the relationship, maintain it and grow it if possible. To the question of whether a Global Player would suffice, the answer is yes, perhaps in theory, but nothing would be riskier... It's another type of risk, sometimes strategic when the bank decides to change targets, review its positioning, its policy, etc... Remember the story of RBS

We may think at first sight that treasurers should only look to partner with the biggest global banks if they want to avoid counterparty risk in this uncertain time. However, again, the story may be more complicate than this binary approach.

We don't think that one “big partner” is the right strategy at all. We recommend a happy medium. Not too much, not too little.... Size can partly determine the number of banks. However, the number needs to be optimized according to internal needs, resources, and constraints. All too often, companies keep local domestic accounts for historical and irrational reasons.

Considerations when implementing a wallet sharing strategy.

When it comes to dividing up your portfolio of operations, you need to consider costs, of course, as well as capacity and expertise, but also the right and fair distribution of business, so that the pie, which is not expandable, is shared equally between activities. A banker who doesn't generate enough business with a corporate client may be tempted to leave one day. Competition is a stimulating factor, but price must remain the primary selection factor, without being a brake on the fair and honest distribution of business. Excess is detrimental to everything, and in the quest for the best price, we sometimes forget to preserve the banking relationship. It's better to have a solid, resilient, and loyal partner, even if it's a little more expensive. Quality comes at a price, and the risks are high, as history frequently reminds us. So let's be prudent as well as fair.

The best ways for treasurers to perform due diligence on a bank they don’t have an existing relationship with is certainly starting by analysis, readings and talks with peers. A relationship is also built over the long term and must be established gradually by creating mutual trust. You must deserve your banker as much as he has to convince you of his suitability. It's a process that can't be achieved with a snap of the fingers.

Use of technology to assess counterparty risk and manage bank relationships.

Technology can help you manage your banking relationships better. Here are a few examples. For example, we can use solutions to measure user satisfaction with their bankers, such as CXFacts. We can also use the statistics offered by systems or platforms such as 360T. In this way, you can determine the volumes processed, and find out which bankers receive what, and which transactions have been proposed to them. You can also rely on specific rating and counterparty risk measurement tools, such as those offered by Credit Benchmark or Treasury Spring. We can also use bank fee analysis tools to identify the fees paid and whether they are in line with what has been agreed by the bank. We even have reporting tools to consolidate these volumetric data, even if we compile data that cannot be consolidated in the same format. You can't compare a loan, a deposit, an FX deal, an MMF investment, a guarantee, or a cash-pooling. But the overall picture will enable you to know what volume of transactions you have entrusted to them before a visit from your banker. This will help the negotiation process and enable the wallet to be shared appropriately and fairly, for example, in proportion to the bank's credit commitment. Some tools are starting to offer to consolidate all this data, while others use XL less efficiently to collect all the data.  

François Masquelier, CEO of Simply Treasury – Luxembourg July 2023

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).