Ensuring effective banking relationships is often cited as the key goal for corporate treasurers. But do such relationships always prove fruitful... or can they end in tears? Increasingly, we are being advised that a good banker can assist in an array of corporate arenas and prove an invaluable asset by exploring and growing the relationship and developing bespoke products.
The banks themselves are adamant that they are now hotly pursuing a Customer Relationship Management approach, with ‘Know Your Customer’, and the provision of a seamless, total service at the heart of their corporate philosophies.
But does a one-stop solution really represent the corporate ideal? For treasurers, ‘making sure your eggs are not all in one basket,’ has always been very much order of the day, a strategy that is well reflected in ongoing objectives to diversify funding across a variety of sources. Indeed, recent research suggests that about 11% of relationship credit volumes will switch to alternative finance before the end of the year (see Corporates targeting liquidity, page 6). In much the same way that treasurers seek to mitigate the risks they face – so too do the banks – and this is clearly illustrated in their growing movement towards purchasing protection against potential default by corporate borrowers.
Consider for one moment the changed dynamics of the borrower: lender relationship when things go wrong. In the past, for a company heading into financial distress, a priority would be to sit around the table with its bankers and agree covenant waivers, the extension of maturities, or even a rescue package. The banks would have a vested interest in seeing the company get back on its feet and into profit as soon as possible.
But the emergence of credit default swaps (CDS) puts a whole new spin on things. Embraced by corporates as a means of protecting themselves against default by trade and financial creditors (see A credit to your business, page 26), these instruments have their roots with banks, who are using them to hedge corporate credit risks on their balance sheets.
If a bank has purchased such cover for all exposures to a creditor company in financial distress, it may not take such an active interest in helping that company resolve its problems.Worse still, it may have a vested interest in seeing that company is pushed over the edge – and declared insolvent – in the knowledge that a greater gain will be made from claiming under a CDS contract than facilitating a rescue package. This brings a whole new perspective to the corporate:bank relationship and is clearly one that will stay at the top of corporate treasurers’ agendas for the years to come.
Should they adopt the one-stop, seamless service model being promoted by banks for all the efficiencies that it promises? Or is there still so much to be said for the traditional risk mitigating strategies that have characterised corporate treasury for so long?
LIZ SALECKA
Editor
