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.
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.