Before joining hands with any bank the top companies are now asking for a banking partner screening process. Like the saying “once bitten, twice shy.” Big companies are no longer just adding a banking partner. They are spreading out their counterparty risk and increasing their banking partner screening in response to the recent banking crisis that has been a “wake-up call“, according to an industry survey to be released on Thursday.
Need for banking partner screening
The companies are worried that possible future bank failures could leave them unable to trade or cause short-term liquidity crunches that could impact payroll and supplier invoices, 88% of companies are looking to increase their number of foreign exchange counterparties, according to the 2023 MillTechFX survey of 250 finance executives in North America.
Their worry is though not misplaced.
MillTechFX survey is just depicting the stark reality in the aftermath of the bank crisis. Multinational companies and those with sales overseas use banks, or counterparties for the transactions, to trade foreign exchange and hedge currency risk.
“All of a sudden there’s a wake-up call,” said Eric Huttman, CEO at MillTechFX, the specialist currency arm of Millennium Global.
Huttman said his firm has added dozens of clients since the banking crisis and all of them have spent more time asking about its counterparty selection process.
“[They want] to make sure that we’ve done our homework and have an institutionalized policy in place, because ultimately, they are trusting us to do that,” said Huttman. “And that they can have multiple banks.”
The failure of several regional and mid-sized U.S. banks earlier this year roiled global markets, sparking fears of contagion risks in the industry. In Europe, UBS (UBSG.S) acquired rival Credit Suisse after the Swiss government orchestrated a rescue plan.
Bank screening news
As per Amol Dhargalkar, managing chairman at hedge advisory firm Chatham Financial, events like these unveil new areas of focus for market participants, and that companies are creating more sophisticated ways to screen banks.
Companies are diving deep into the financial disclosures to better understand banks’ securities portfolios and whether there are any embedded losses of concern. Banks’ exposures to commercial real estate lending, their credit default swaps and how much interest rate risk they have are also data companies are requesting.
“The broad questions that companies are asking are, is my banking partner sound and will they be there when I need them,” said Dhargalkar.
Bank crisis 2023
In March 2023, over the course of 5 days, three small to midsize U.S. banks failed, triggering a sharp decline in global bank stock prices and swift response by regulators to prevent potential global contagion. Silicon Valley Bank (SVB) failed when a bank run was triggered after it sold its Treasury bond portfolio at a large loss. Silvergate Bank and Signature Bank, both with some exposure to cryptocurrency, failed in the midst of turbulence in that market.
Another attempt to calm the banking crisis came most notably from Switzerland, where on March 19, Credit Suisse was acquired by rival UBS in a government-brokered deal with an attempt to halt the banking crisis. UBS and the Swiss government were praised for the deal, to prevent Credit Suisse from collapsing and causing further crisis within the banking system.
