Report Highlights new Counterparty Risk Concern for US Corporates

The global banking meltdown is putting the brakes on US companies’ drive to add efficiencies to their cash management operations by consolidating their services with a few big banks, according to the results of Greenwich Associates’ 2008 US Cash Management Research Study.

One of the strongest trends in corporate treasury management over the past several years has been the push by companies to form deep and lasting relationships with a relatively small number of banks. This type of consolidation can increase efficiency and boost a company’s clout with important lenders. In particular, the growing use of electronic payments and receipts encourages companies to integrate their own treasury systems with those of big banks with sophisticated technology platforms and broad capabilities.

As recently as five years ago, the typical large US company used its lead cash management bank for about half its cash management needs. Today, companies use their lead providers for about two-thirds of their cash management services. “Companies have been comfortable consolidating their cash management services with large banks in part because many of them deliver exceptional levels of service,” says Greenwich Associates consultant, Don Raftery.

The sudden ascendancy of risk management

At first glance, collapses and brink-of-death mergers in the financial service sector would seem sure to accelerate the consolidation of companies’ cash management business. After all, there are now fewer banks to choose from. But a strong countervailing force is emerging: Companies spooked by the failures of individual banks are now elevating risk management concerns to a top priority when choosing banks for cash management, credit, and all other services. Instead of shortening bank lists to grow buying power and efficiency, many companies are on the lookout for willing lenders with solid financial performance in an effort to preserve continuity of service and continued access to credit.

Credit concerns make a dramatic return

Companies’ efforts to address cash management counterparty risk already are conflicting with the need to secure and preserve access to credit during an unprecedented credit crunch. Traditionally, companies have tended to use important lenders for cash management service in order to increase their importance as clients and help keep credit flowing at competitive prices. That link began to erode during the easy credit period leading up to the summer of 2007. “However, with the breakdown in credit markets, access to credit has once again become a precious commodity,” says Greenwich Associates consultant Chris McDonnell. “So even as companies look to diversify their credit bases by forming relationships with new banks, they will be feeling increasing pressure from their existing lenders to send more non-credit business their way. Treasury management and the deposits are often at the top of the list.”


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