From threatened downgrades to the euro debt crisis to capital/liquidity requirements, global banks are still struggling.
Take your pick in what to call the banking sector these days. Rented mule? Punch-drunk boxer? Red headed stepchild? Whatever you call it, members of the sector continue to stagger around looking for relief. So it is incumbent upon treasurers to stay focused on banking relationships and knowledgeable of the dynamic environment.
This has been illustrated over the past several days as headline after headline trumpets the sector’s woes. Earlier this week the euro crisis claimed another bank, this time in Spain where Bankia, the country’s third largest bank by assets, was set to be bailed out.
And bank stocks are also under siege. Global financial institutions are trading near liquidation lows as analysts predict no rebound in revenue or profitability soon. This is because banks continue to try to meet Basel III capital and liquidity requirements ahead of time (see related story here), which has meant de-risking the balance sheet and less lending. This is something former Deputy Governor of the Bank of England Sir John Gieve has said must stop. “Pressure on liquidity and capital, plus continued debate on what is an allowable banking model, is pushing [banks] to deleverage more than they might be forced to anyway,” according to the Telegraph (UK).
According to the Wall Street Journal, the latest round of euro angst has also forced banks there to hoard cash at central banks. “At the end of March, 10 of Europe’s biggest banks had parked a total of nearly $1.2 trillion of cash at central banks around the world,” according to WSJ data. “The total is $128 billion higher, or a 12 percent jump, since December and up 66 percent from the end of 2010.” Banks often keep money with central banks for safety. And the more cash in those accounts, the less there is circulating in the business and larger economy.
And one problem seems to beget another. Since banks are less profitable and the future is less than bright (or certain), they’ve come to the attention of rating agencies. In February Moody’s said it would review the creditworthiness of 17 banks and securities firms with global capital-market operations. This could further sap bank reserves. Enter Morgan Stanley, which recently announced it might have to put aside more than $7bn in collateral if it gets downgraded; much more than the $4bn it said it had planned for.
With all this in mind, corporate treasurers must continue education themselves in evaluating banks as acceptable counterparties. They must also manage their core bank group with an eye to the regulatory impacts on bank offerings, both in access and pricing, and the in timing of these impacts. This is critical as things will likely get worse before they get better. It’s still several years away from the actual implementation of some of the regulatory requirements. And who knows what the economic environment will be like, or what Europe and the euro will look like?
For those current and future bank relationships, trust but verify. Do the due diligence in conjunction with the raters; maybe even try to get access to all stress test results.