Most companies face growing funding challenges in a volatile global economy. With banks costs increasing, further pressure on economic activity is inevitable.
For corporate treasury teams, who rely for their day-to-day funding on banks that investors have lost confidence in, the risks appear high. Yet banks must still manage risk and provide fairly-priced funding to companies and support the Real Economy. This is clearly a challenge for banks focused on sustaining their Balance Sheets. However, it also forces companies to spend core time managing their bank relationships1 leaving them with less time to grow their business. It should be no surprise when credit intermediaries like banks therefore look to pass increasing costs through to customers when they can.
Banks are telling everyone that increased funding costs are inevitable. Our role is not only to prove this a fallacy but also to improve both the availability and 'all-in' funding cost. This can be achieved by addressing an underlying cause of the financial crisis; weak measurement, monitoring and transfer of credit risk. Few of the analytical tools banks relied on to assess financial risk have proved reliable. Instead, financial markets embraced complexity to structure, package and "sell" risk assets such as mortgages and corporate loans. However, this innovation did little to help companies maintain working capital liquidity during this or indeed previous economic downturn.
It is therefore essential that more effective products and services address these underlying causes of the financial
contagion and :-
1) enable companies to protect anticipated cash-flow particularly given the increasing role of cross-border credit risk.
2) reduce "all-in" funding costs & improve the availability of funding by reducing risk.
3) increase competition for a company's banking business.
4) strengthen Credit Risk Management and Internal Controls.
5) reduce information asymmetries that hid mis-priced credit risk.
Central to each trade receivables transaction we arrange is a predictive analytical tool offering timely credit risk information. It provides Corporate Treasury with a single dynamic view of credit risk. This tool also provides banks with the risk intelligence necessary to ensure covenant compliance and that funding eligibility criteria are met.
Banks are suffering from the uncertainty investors and regulators have in bank risk pricing models. Our process addresses this uncertainty. Credit risk is more effectively transferred for both client and bank. It reduces bank risk-weighted exposure costs and ensures significant economic value is unlocked for our clients. If existing banks are reluctant to pass on these savings, alternative potential bank and non-bank funders will ensure funding terms are competitive.
The main reason this approach improves on bank-sponsored transactions is because capital allocation benefits from both Basel II/III and incoming Solvency II rules. These rules create a single risk-based bridge to bank or capital market funding. Credit risk transfer methods widely used by banks, regulated insurers and reinsurers can be effectively combined to improve outcomes for both debtors and creditors.
What we propose isn't a "black-box" approach; it is transparent. Our clients maintain significant influence over the ongoing funding process and cost; a positive feedback loop is created. Banks value it because not only does the process cost them little administratively and reduce their capital but it is also collaborative, transparent and data-driven.
The Deputy Governor of the Bank of England, Paul Tucker said in a speech earlier in 2011 2 :-
"Our capital markets and much of the ‘plumbing’ of the financial system… rely on confidence in the integrity of the assets being traded, in the robustness of counterparties, in the reliability of infrastructure. Crises nearly always involve that confidence sliding away."
Companies can protect against this slow slide. Not only will it creates Enterprise Value but also advantages over competitors.
