Some 40% or 7,958 of non-financial institutions that responded to Euromoney’s 2014 Cash Management Survey said they were “very concerned” about the stability of the global banking sector, with 38% of respondents stating they are “slightly concerned”. The results come as the International Monetary Fund warned this week that Eurozone banks need to engage in a more fundamental overhaul of their business models, including a combination of repricing existing business lines, reallocating capital across activities, consolidation or retrenchment, if they are to better support the economic recovery in the region.
In its twice yearly Global Stability Report, the IMF also said it had found that a quarter of 300 banks in advanced economies still do not have adequate capital buffers or even the profitability to support lending growth of 5% a year.
Governments and financial regulators have enforced profound change on the global banking industry since the 2008 financial crisis to ensure greater stability and strength in areas such as capital and liquidity, but recent fines by have highlighted fresh vulnerabilities.
Bank of America’s record $16.65 billion fine by the US authorities in the summer to settle charges it sold flawed mortgage securities in the run up to the financial crisis came shortly after BNP Paribas agreed to pay US regulators $9 billion to resolve accusations it violated US sanctions against Sudan, Cuba and Iran. HSBC and Standard Chartered have similarly been hit hard in recent years.
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The ever-increasing size of such fines and the uncertainty around which bank could be next in the firing line is of concern to treasurers, but a more pressing concern for them will be the legal restrictions on certain client banking business that can often follow.
BNP Paribas has been banned for a year from clearing US dollars for its oil and gas financing business in European and Asian cities as a result of its settlement. It is also banned for two years from acting as a correspondent bank for third-party banks in New York and London.
As such, and where it is not already doing so, BNP Paribas will have to funnel its dollar transactions related to the suspended businesses through other banks, which potentially risks the loss of corporate clients and increased costs to its business.
Large global banks can absorb such fines, and some corporate clients will be more sensitive to business restrictions than others, but when the net effect of this threatens a bank’s credit ratings, that’s when treasurers can get nervous about their banking partners.
Credit ratings of banks are important to treasurers because they have typically been the main measure they use to assess counterparty risk, which means companies can be highly sensitive to any rating downgrade by any one of the main three agencies.
Indeed, while 43% or 8,048 of non-financial respondents to the survey said it was unlikely they would issue a request for proposal due to a rating downgrade of their cash-management bank, 41% of respondents said such action was likely and 16% said very likely.
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Standard & Poor’s, for instance, moved to affirm BNP Paribas’s A+ long-term rating in July on news of the settlement with the US, but it had previously put the rating “on credit watch with negative implications” in June based on their view the potential penalty could result in “adverse changes to the bank’s risk-adjusted capitalization, and disruption to banking activities.”
In affirming the rating, S&P said it revised its assessment of the bank's capital to "moderate" from "adequate" and placed the rating on a negative outlook from credit watch negative.
"The negative outlook reflects that we may lower the ratings on BNP Paribas if the implications of the sanctions on the bank's risks and business profile are more detrimental than we currently expect," stated S&P.
While treasurers have also been using the price of credit default swaps on their relationship banks to asses counterparty risk, many have introduced limits restricting which banks their companies could deposit with, and how much cash could be placed with any one.
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Lars Cordi, vice-president and treasurer of international brewer Carlsberg, says where they have a need in certain markets for bank deposits, they try to spread the risk between “the best-rated banks”.
He adds that their preferred way to manage bank counterparty risk is to aim to have a net-debt position versus the banks or by having netting agreements in place, which can offset one or a series of certain exposures.
Another way to manage down bank counterparty risk is to shift a higher proportion of corporate cash out of deposits with banks and into money market funds or by investing directly in short-term, money market securities such as commercial paper.
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The European Central Bank’s (ECB) historic move in June to cut the deposit rate from 0% to minus 0.10% – raising the prospect of companies paying banks to put cash on deposit – could have accelerated this shift, but according to most survey respondents this has not changed their investment strategy.
Indeed, some 42% of survey respondents said they did not know if the ECB's rate cut on deposits had impacted their core cash-management/investment strategy, while only 9% said that it had.
For now, many large companies continue to stockpile their cash reserves, investing in a combination of bank deposits, money markets funds and short-term securities, all of which offer good liquidity. And asked whether they expect there to be some form of contraction in market liquidity in Europe over the next 6 to 12 months, some 50% of survey respondents said that they did not know if a contraction would happen, while 29% of said they did not expect it and 22% said that they did.