PracticeAccounting FirmsOn good terms with the bank

On good terms with the bank

Hugo van Wijk explores the best ways for accountants to manage and improve their relationships with banks

THE CREDIT CRISIS has revealed many things – amongst them is that the availability of credit banking services and the sheer availability of banks themselves, cannot be taken for granted.

This has lead to a need for fundamental change in the corporate management of bank relationships: it is not just the bank that is taking a credit risk now. The customer also has to manage a supplier risk. In most supply chain management that is nothing new, but for most financial service providers it is.

Managing bank relationships, or putting it in technical terms Bank Relationship Management (BRM), is a critical responsibility of financial management. The credit crisis has shown that regulation and supervision have their limits. Of course, new, far-reaching regulation has been proposed, and various initiatives have been developed to strengthen supervision – both issues have been addressed in the Basel III proposals. But at the same time the regulators also state very clearly that, in itself, regulation will not be enough and the market must play its role as well. In the words of Nout Wellink, chairman of the Basel Committee: “There are limits to what supervision can do. We cannot supervise everything, even if we wanted to”.

Companies that use an effective BRM-strategy can ensure that they are working with the right number of right banks, have visibility over their relationships at competitive conditions with minimum risk of disruption.

The obvious starting point for such a strategy is to take stock of the current banking landscape. This goes well beyond establishing a list of the current, active bank relationships. It requires some serious homework to ensure a precise overview of what kind of products and services are currently being sourced from which banks, in terms of credit facilities, cash management and treasury to name but a few of the most obvious products. Quantifying the banking requirements on an annual basis in terms of volumes, conditions and associated revenues and returns created for each of the banks is the first step. If you don´t know where you are today, you cannot know where you´re going, or where you should be heading.

The upside of this homework, however, is that this will usually reveal some imbalances and inconsistencies that offer opportunities for rapid improvement. That in itself make the exercise worth its while. From this quantitative starting point, the next step then is to assess to what extent the current wallet is distributed over the right number of banks, so as to assess whether enough critical mutual dependency in the relationships exists. There are a number of companies out there who think spreading their eggs over many baskets creates security, since it avoids dependency on one or few banks. They could not be more mistaken.

If you are not strategically committed to the bank, why would they care about the relationship when things head south? As much as one can be underbanked, one can also be overbanked, and both really are equally risky. Being overbanked carries a domino-effect risk. As soon as one bank exits the relationship, because there’s not enough strategic share-of-wallet, the other banks, equally without strategic share-of-wallet will wonder: “what do they know what we don´t? Why run the risk anyway?” and soon the whole banking herd may run for the door.

Once the right number of banks has been identified, one can continue to identify which are the right banks. That could be quite a different set of banks to what the company has today, not in the least because following the credit crisis, some significant shifts have taken place in the banking world. Some banks have substantially re-oriented their business models, and differences in product capabilities have increased quite a bit as well. This increased differentiation between banks has obvious implications for what may be the best fit.

If this sounds like quite a lot of work, you would be right. The good thing is that most of it needs to be done only once – after that it´s maintenance, monitoring and re-validation. The benefits are huge, often delivering immediate short term pay-back in addition to much improved management of risk and significantly increased control over the bank relationships.

In most cases, one will have gained a substantial information advantage over the banks, and also a much better and deeper insight into the precise metrics of each bank relationship. Remember that most banks struggle with precise client account profitability reporting, due to internal constraints where revenues need to be triple booked under client, product and geography.

Take care not to re-invent the wheel. A sensible approach may well be to dedicate internal resources to the necessary data collection but make use of external resources for converting this data into the necessary analytical information that provides actionable intelligence. Moreover, not all necessary data can be gathered economically internally. For example, information on credit risk rating and appropriate Basel II /III input, as well as information on a bank’s KPIs and capabilities typically will not be available in-house, but is nonetheless critical to make the right analysis, to arrive at the right conclusions.

Twenty to thirty years ago supply chain management (SCM) and customer relationship management (CRM) were just buzz words causing disruption, but they eventually opened up enormous business optimisation potential. Today, nobody questions the necessity to have both SCM and CRM in place – it would be considered simply unprofessional not to have this well managed. This realisation is coming to many organisations worldwide with regards to BRM and they are placing it firmly into that same category of business must-haves. Your bank relationships are too business critical not to have in order, and it is not realistic to rely completely on regulators and supervisors to ensure a viable and functioning banking system.

Hugo van Wijk is co-CEO of Vallstein


Nine Steps to Immediate Banking Relationship Management

1) Assess the current annual revenue value that your company represents for all of its current banking suppliers, across all banking product

2) Independently assess your current credit risk rating, by approximation, in order or validate and/or constructively challenge the qualification of the bank

3) Independently assess the capital requirement under Basel rules specifically applicable to your situation and associated with the current revenue value

4) Isolate your own contribution to the overall shareholder’s return of each bank

5) Assess the Service Quality of each bank in a tailored survey

6) Assess your bank/s on KPI’s that are relevant for you, for example…
a. Overall operating costs, including bank staff compensation
b. Bank shareholder return requirements

7) Define the relationship optimisation strategy…
a. Define suppliers – how many banks you wish to work with and which banks are preferred suppliers?
b. Decide how to divide the business across the defined banks?
c. Define the most attractive terms and conditions as a basis for your negotiation

8) Execute and achieve sustainable wins

9) Continuously monitor and improve

Annual Banking Survey Findings

Vallstein’s recent annual banking survey in The Netherlands shows…

• 65% of respondents indicate that the apparent risk management practices of banks will play a role in bank selection criteria going forward
• Likewise, over 50% will look critically at the Return on Equity objectives of the bank when deciding on bank relationships
• Geographical focus and compensation policies of the banks will be relevant to more than 40% of the companies. How the banks manage themselves, and how transparent they are will play a bigger role going forward in how companies manage their bank relationships.


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