Why Corporates are Looking to Regional Banks

Published: January 01, 2010

Robert C. Statius-Muller
Managing Director, Greenwich Associates

by Robert C. Statius-Muller, Managing Director, Greenwich Associates

The desire to eliminate risk from businesses and balance sheets is driving companies around the world to seek out relationships with regional banks that are able and willing to provide products for newly intensified risk management initiatives.

The global financial crisis ushered in a global focus on risk management among companies and financial institutions alike:

  • For companies and investors, volatility in global markets and the painful economic contraction has eliminated any room for error, thereby elevating risk management to a top strategic concern. While corporate demand for many financial products has plummeted over the past 18 months with the slowdown in the business environment, demand for hedging products such as commodity derivatives has steadily increased. At the same time, the new risk management imperative has made companies much more selective about the banks with which they’re doing business. The demise of Lehman Brothers and other large financial institutions delivered a strong message about the dangers of counterparty risk, which now ranks as a primary concern among corporate treasurers and investors alike.
  • For their part, global banks have been forced by balance sheet constraints to retrench and realign their businesses to focus on core clients and markets. In many cases, banks that once competed aggressively for the business of companies in specific markets and countries are now unwilling to risk the capital or devote the resources required to service some former corporate clients.


As a result of these trends, almost two-thirds of European companies surveyed by Greenwich Associates in June said they were re-evaluating the roles of their banks following the events of the past year. Figure 1 illustrates how 26 large banks have fared through the global crisis in the eyes of European corporate clients. The results are not pretty. All the banks depicted in the display saw their reputations deteriorate among corporate clients except two: Nordea and Banco Santander. It is no coincidence that both banks are considered regional players in the European marketplace or that neither bank has to date experienced the types of crippling write-downs that have hamstrung some pan-European and global competitors.  

Changes to bank rosters

Banks like Nordea and Banco Santander in Europe have become more attractive to companies for two interrelated reasons. First, regional banks are not seen as having the significant levels of counterparty risk still associated with some larger financial organisations. Almost 55% of companies cite ‘financial strength and stability’ as one of the core factors they consider when selecting a bank as a strategic partner—a bigger share than those citing ‘demonstrated loyalty and commitment’ or ‘willingness to lend’.

Global banks have been forced to retrench and realign their business to focus on core clients and markets.

In elevating the management of counterparty risk to a top priority, companies are moving in lockstep with the world’s largest and most sophisticated institutional investors. Recent research by Greenwich Associates reveals that institutional investors have made dramatic changes to the rosters of banks they use for critical services like capital markets trading in order to minimise their exposure to banks they see as having significant amounts of counterparty risk. In fixed income, more than half of the largest and most actively trading European institutions shifted trading volumes to dealers with the least amounts of counterparty risk from 2008 to 2009, as did almost 40% of European institutions as a whole. Almost a third of all institutions reduced the overall number of fixed-income dealers with whom they trade, and fully one third of the biggest and most active traders actively shifted trading volume in order to reduce the amount of trade flows concentrated with any one dealer. Similar trends are evident in the United States, where regional fixed-income dealers gained ground on national and global firms last year.

Of course, concerns about risk management are not the only motivations for companies looking to change their bank relationships. The second and probably more important reason that companies are gravitating to regional banks is that regionals are lending to local corporate clients to a much greater extent than their global peers. The ability to lend puts regional banks in a strong position in a marketplace in which three-quarters of companies report having to pay higher interest rates on their financing, more than a third have had to accept more restrictive covenants and fully one quarter have had to reduce absolute borrowing amounts. In this credit environment, companies have a strong incentive to reward dedicated lenders to the fullest extent possible with foreign exchange, cash management, derivatives trading and other treasury-related business.[[[PAGE]]]

Much of that business remained robust right through the worst of the global market crisis. The June 2009 survey of European companies revealed that corporate demand had fallen sharply for a range of financing products, including funding for ongoing operations, structured finance, capital expenditures and acquisition finance. Demand had increased in only one category: hedging products. For example, in 2007 — prior to the onset of the crisis — only about 13% of companies in Europe were using commodity derivatives. That share has grown to 20% as of 2009.

Who are companies turning to for these hedging products? For a task as critical as hedging, companies require banks that have a deep understanding of their needs, boast impeccable market credentials and deliver the highest quality of service. However, a growing share of companies — 41% in 2008, up from 37% in 2007 — cite existing lending relationships as a key criterion used in selecting a dealer for strategic derivatives transactions. And increasingly, these lending relationships are held by regional banks.

The effects of new regulation

It remains to be seen, of course, whether regional banks will be able to retain this newly acquired business. While many regionals are proving that their capabilities in foreign exchange, derivatives trading and cash management are top-notch, even a gradual recovery on the part of global banks will enable them to commit a bigger part of their enormous balance sheets to corporate lending, and national governments that used taxpayer monies to bail out global banks will be exerting strong pressure on them to do just that. If and when global banks resume lending, treasury management business will begin flowing back in their direction. The global derivatives business could soon face another major wild card in the form of efforts on the part of regulators to shift the business to exchange-based trading and centralise the clearing of OTC derivatives — initiatives that were supported by between 65% and 70% of European companies when first proposed. However, there is now substantial anecdotal evidence that companies have started to realise that this type of regulation will come with substantial costs and make hedging less attractive and more expensive.

While it is far too soon to say how such broad regulatory changes would impact the businesses or strategies of the banks, there is little reason to think that overall dynamics of the corporate banking market will change much in 2010. Global banks are still in the process of deleveraging and shoring up capital reserves, leaving little excess capital or appetite for corporate lending. In the capital markets, 40% of institutional fixed-income investors in Europe still see liquidity shortages as a real risk, and more than 35% are still worried about the prospects of another systemic event. As a result, companies are faced with the prospects of navigating tight credit markets, an economy that is recovering slowly at best and commodity markets that remain highly volatile — all without much in the way of support from the banking giants that once aggressively courted their business. In the coming year, regional banks might represent the best option — and in some cases the only option — for companies in need of essential credit and treasury management products.  

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Article Last Updated: May 07, 2024

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