From the September Special Report issue of Treasury & Risk magazine

Know Thy Banking Partners

In the wake of the financial crisis, corporate treasuries are paying closer attention to the risks they’re exposed to in dealing with their banks.

The events of the last five years have reshaped companies’ understanding of the risks they face when dealing with their banks. While concerns about bank counterparty risk have subsided from the levels seen in the immediate wake of the U.S. financial crisis and during the various flare-ups of Europe’s sovereign debt crisis, the lessons have sunk in.

“Corporate treasurers certainly have wakened up to the fact that when it comes to the banks they’ve dealing with, things can happen,” said Matthew Dunn, senior manager in Deloitte’s treasury risk management practice. “Things can happen fairly quickly. As we saw in the crisis, even large banks could not exist anymore overnight. It really can happen that fast.”

Tracking Counterparty Risk

As corporate treasurers consider the possibility that one of their banks could run into problems, perhaps the biggest response has been an expansion in treasuries’ monitoring of their banks.

Edward Altman, a finance professor at New York University’s Stern School of Business who devised a formula, the Z-score, for predicting corporate defaults, cautioned that coming up with a method for predicting which banks are going to run into problems has proven more difficult than building a model to identify which industrial companies are likely to default.

“It’s my experience that failure prediction models have done fairly poorly when it comes to financial institutions,” Altman said. “It always seem that the latest banking crisis is caused by something fairly unique to the current situation and not necessarily correlated with prior bank crises.”

How Many Banks?

If companies are worried about stresses affecting their banking partners, one approach would seem to be to do business with a larger number of banks. But it’s not clear to what extent the concerns have influenced the longstanding trend of companies consolidating the number of banks they deal with.

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