For those around in 2008, the events of the last few weeks or so might feel like déjà vu - well, it is, and it isn’t…
There have been huge swathes written about what has been going on; personally I found this article from Chris Skinner (a popular speaker at a previous ACT Annual Conference) particularly informative: Like Schrödinger’s cat, is this bank dead or alive? - Chris Skinner's blog (thefinanser.com).
The summary is that in his view (and mine, which is maybe why it resonates with me), we have the failure of banks with different issues, and rising interest rates - a scenario that many in the financial markets (i.e., anyone who joined since around 2010) are just not familiar with - that highlighted flaws in the business plans of some banks.
As an aside Credit Suisse is a slightly different matter – that was a (more) financially secure bank with a history of lax risk management, poor internal controls and several large write-offs. Apparently, it was the disclosure of ‘material weaknesses’ in their latest annual report that triggered the run on their shares but arguably it was only a matter of time before Credit Suisse failed. The events in the US focussed attention on the banking sector and triggered the death spiral for Credit Suisse…Investors are now looking to see what other banks may be at risk (and to be clear these are well capitalised, financially sound banks).
So, there we have it – we may, or may not, be facing a re-run of 2008…
But what does this mean for corporate treasurers?
Two words: Risk Management
Never underestimate the importance of risk management – something that arguably some of the banks had overlooked, or at least mis-judged. In particular, recent events demonstrate just how important it is to identify your risks. Then you can quantify them and decide how (whether) to manage them.
To break this down in the light of recent events, we’ve listed some of the risk categories that might be reviewed – some of these (fx, liquidity) should be very familiar, others (contagion, reputation) may not be. There are extensive resources on the ACT website covering many of these and the ACT Annual Conference in May (presciently perhaps) focuses on ’Managing Risk in times of crisis’- do come along (you may be eligible for a complimentary place).
So, in no particular order:
Do you really understand the extent of your exposure to individual banks (and other financial institutions): how do you monitor this – and how frequently? Do you have a diversified bank group, and if not, are there steps you should be taking to mitigate any risk of overexposure to an individual counterparty?
Clearly not all organisations can (or should) have an extensive bank group, but there are a few things to consider:
Interest rates sat at historically low levels during the 2010’s and active risk management (e.g. fixed/ floating profile) took a step back. As rates move back towards their longer run norms, many have been caught out – and that includes banks.
The events in the bank markets have made everyone nervous. One of the consequences is that the availability of liquidity has become more constrained.
Although, generally speaking, central banks are pragmatic when the system needs liquidity, this may have consequences for corporates looking to fund in the short term. Again, good risk management practice is to spread maturity profile of debt and to fund in good time wherever possible.
‘Flight to quality’ – here we go again… however it gets dressed up, whenever there is market uncertainty, we see a ‘flight to quality’ – perhaps this might be better described as a ‘flight to safety’ but the principle remains sound – those banks with a strong risk management framework (and yes that might include adoption of the Basel Accord in full, or unlimited deposit guarantees ) are, arguably ‘safer’ places for deposits… this is also why we see liquidity flowing out of banks and into money market funds (ironically some with the same banks but with a rather different risk profile).
Hybrid structures may work efficiently in ‘normal’ conditions but can become stressed very rapidly in challenging conditions – need to check that these are appropriate products for the organisation as market conditions change.
And to round out the list with a few that aren’t directly linked to recent events but if you’re doing housekeeping are worth considering:
FX risk – it’s a perennial problem but do you have visibility of the real FX exposures across the organisation?
Commodity risk –relevant for more businesses as the ability to hedge energy costs for example become widespread.
Cyber risks – both internal IT / business continuity and developing a planned response for when (and increasingly it is ‘when’) the organisation faces a cyber-attack of some sort.
To summarise, a list of questions:
The financial conditions experienced during the 2010’s perhaps lulled markets into a false sense of security with the result that people have taken their eye off the risk management ball… time to make sure you not only know where the ball is, but that you’re actually on the pitch…
A separate note occurs to me as we’ve seen mention in the media of the role of short selling organisations in the events in the US in recent weeks.
Putting aside the debate about whether short selling is a desirable practice (in the UK, HMT recently issued a discussion paper on this very subject to canvass opinion – see the ACT response here), it’s interesting to observe that short sellers flagged concerns about SVB and Signature ahead of recent events – it’s unclear whether the FDIC followed up, but one wonders whether short sellers are the canary in the coal mine or the match?
After 2008, the global regulatory community in the guise of the Bank for International Settlements through the development of the Basel Accords identified ratios and made recommendations regarding operational parameters for financial institutions to mitigate the ‘too big to fail’ risk of governments having to provide support to failed banks to prevent market chaos. Basel III has been widely implemented – but interestingly (?) in the USA, this rule is only applied to the very largest banks – and SVB as the 16th largest (by Balance Sheet size) didn’t need to apply these rules (or indeed any variant of them).
i Basel III: international regulatory framework for banks (bis.org)
