Regs and the debt crisis have made choosing the right bank partner more difficult.
Between the debt crisis and regulation, treasurers will have to work hard going forward in separating the wheat from the chaff when it comes to picking global banking partners. This was one take away from a recent NeuGroup Treasurers’ Group of Thirty (T30) meeting, where China, India and board communication trends were also top of mind.
HSBC, as the meeting sponsor of the March 7-8 meeting, provided additional perspective as an FSA-regulated global bank with critical insight into key growth markets.
Sharp eye needed. One big concern raised by the euro debt crisis will be how (or whether) the capital and liquidity requirements for banks create an uneven playing field for bank relationships. This will occur between those banks that are going to be upfront about the eventual crisis impact and price products accordingly, and those banks that will wait and seek share in the interim. Much of this will depend on the regulatory jurisdiction of the bank in question, as well as the strategy of bank management. This is also why adding a single Chinese bank to your bank group might be worth the administrative hassle.
Accordingly, corporate treasurers need to become more sophisticated in evaluating banks as acceptable counterparties and manage their core bank group with an eye to the regulatory impacts on bank offerings, both access and pricing, and the timing of these impacts. The window three to five years from now is being highlighted as that when most fluctuations will hit, as the regulatory impacts will bite a wider swathe of banks and interest rates and perhaps inflation will be showing upward trends then, which will change the dynamics of bank (and capital market) relationships substantially. Ladder your revolver maturities and plan to amend and extend to avoid too much refinancing in this 3-5 year window and do the same with debt issuance. There is a reason that investor demand is strongest for this period. And this underscores the importance of taking a wider view than just getting the absolute best price today, it ends up costing you down the road when a bank shuts down your swap rollover or needs to promptly exit from your revolver because the economics just no longer make any sense.
Metrics, methodologies review. In conjunction with the above, review your metrics and methodologies to manage bank relationships and up the sophistication of the bank evaluation model you use and the qualitative assessment dialogue that quantitative models should be designed to trigger to continually reevaluate the quality of your bank group portfolio. Also, watch how banks are dealings with each other and other market participants are changing and challenge bank counterparties on why their practices with corporates should not be changing too. For example, should swaps be priced off Fed funds instead of Libor, or should collateral be discounted using OIS?
These are matters the board should also understand. While the detailed treasurer-led presentations to the full board may have leveled off since the crisis, the audit, finance or risk committee presentations need to keep harping on the changing rules of the game that are coming.
The bank relationship dynamics accelerated by the European crisis also point to how treasurers should be positioning their response to it. Exposure in Europe is just one part of it and the lessons learned applicable globally. For instance, a key takeaway from the previous T30 meeting was that suppliers reliant on bank financing, as many are in Europe, would be at risk and MNCs dealing with them should consider this commercial counterparty risk. Well, in India where base bank lending rates of 15 percent are common, the dynamic is even more pronounced. If you are planning to extend terms in a country like this without considering some form of financial support, watch out. More and less glaring examples will become clear once you start to look for them.