Know your Bank

Businesses cannot work without banks. They are needed for cash management, money transfers, trade services, asset finance, bond issuance, M&As, vanilla loans, traditional deposits and so on. Healthy banks are needed to carry out their traditional role of maturity transformation (taking short term deposits and lending long term on mortgages, infrastructure and term facilities).   
However banks are under particular pressure these days due to new regulations (requiring higher capital and liquidity and leading to higher pricing for customers), sovereign risk issues (affecting some assets they hold), funding cost issues, pressures for profits from shareholders, etc.
Banks are strong supporters of their domestic economies and becoming quite selective in the transactions they support. Relationship issues seem to dominate their preferences with customers. Without ancillary business (business other than loans to support an adequate return on equity) they find it difficult to do loan business.
A particular feature that financial directors need to beware of is the declining credit quality of their banks. As well as the risks on counterparty risk for own cash and undrawn revolving credit facilities, banks are often used to enhance the credit of a business, by way of letters of credit and bank guarantees. Many stories are emerging of weaker banks being refused as issuers of these products, leading to financial directors having to change their practices (diversification on cash management, seeking alternative sources of finance, seeking alternative ways to hedge risk, etc.) and possibly their banks (recognizing the ever present risk of a bank failure, even among the bigger names).
Therefore, the lesson is to Know your Bank, work out what is important to you and them and have sensible discussions to ensure that each gets the most out of the relationship, i.e. the business can get the products that satisfy its needs and those of its clients and the bank can make an adequate return.
 
Replay Business © 2011 Costas Stabolas| Designed by Nowmysite.com