Concerns around the banking sector that started with the collapse of Silicon Valley Bank (SVB), saw Credit Suisse being taken over by UBS, and generated further ripples across global finance, are prompting treasurers to think again about their banking relationships.
Geoff O’Dea, a partner at law firm Goodwin Procter, says a top priority for treasurers is ensuring their bank is systemically important “because they’re more likely to receive a government bailout”, given the Bank of England didn’t afford SVB’s UK arm that status initially. The Bank later realised that the high concentration of venture capital, life sciences and tech start-ups banking with SVB in the UK meant that they would use their resolution powers to facilitate the sale to HSBC to avoid systemic damage to that highly important segment of the UK economy.
O’Dea also strongly recommends examining bank account arrangements, especially when you have more than one account at a single bank. “A lot of them will have covenants in their loan agreements that require you to bank with the institution. That was one of the issues with SVB with its clients amongst the VC, tech and life sciences community,” he says.
“For smaller companies, you might fit within the preferential rung in the insolvency waterfall, but if you're a large company, you’ll be an unsecured creditor for amounts above the £85,000 guarantee – so that's why you would need to examine that,” he says.
More broadly, O’Dea calls for treasurers to be vigilant on interest rate risk. “Duration risk, particularly for long-dated bonds while we have an inverted yield curve, is an issue that no one's had to think about for the last decade, because rates were zero. So even if you're not required to mark to market, have some thoughts on diversifying out of that, and ensure you have a good understanding of your interest rate swaps and related areas,” he says.
Colin Evans, a director of treasury consultancy Elite Treasury Services, says that, irrespective of the current turmoil, a forward-thinking treasurer should place a very high value on building strong banking relationships. “Thinking of the current macroeconomic situation, bankers will be more inclined to provide support within the bank to clients with whom they feel they have a good two-way relationship.”
He says it is important to think about the banks that provide cash management banking and ancillary services in this context, rather than the investment banks that underwrite a lot of borrowings, but don’t service the everyday needs of the client, particularly if there are no immediate major debt refinancing requirements. For smaller corporates this is more important as financing may only be available from the main cash management banks.
Evans adds that those cash management banks’ willingness to offer credit facilities, are particularly driven by strong relationships coupled with the profitability of the overall client relationship; corporates who offer key banks a good stream of ancillary product income and enjoy a good overall relationship can be more supportive of the corporate’s everyday credit needs, even if times are challenging.
“There are treasurers who don’t see the importance of building good relationships, including those with potential new bank partners," Evans says. "However, if an incumbent bank suddenly goes cold on a client, maybe resulting from a change of credit profile or ownership or the banks policy), this can put unwanted pressure on the corporate to switch banks when there are no obvious substitutes.
“To the extent a corporate has a bank syndicate, it’s important to reward them with core banking business to build some reliability into the lender group for future refinancing etc. The opposite is also valid – pursue new relationships with banks who show a real appetite to engage with the corporate, especially if they are a good fit with the geography or banking needs of the corporate, which may provide an opportunity to shape the future lender base.
“Anyone who is facing refinancing right now with weak relationships may find it hard due to the lack of any banks who will proactively advocate for corporates.”
Robert Waddington, a partner at PwC, says that treasurers should take time to assess the quality of their banking relationships. He says: "Some treasurers regularly monitor the products they use from each bank and the quality of the service they receive."
He advises treasurers to look at “the services, products and facilities you have and monitor the costs associated with them”.
Lawrie Holmes is a freelance business and financial journalist