Corporates Can Learn From Bank Stress Test, Says Wall Street Systems

The stress tests recently used to test the financial strength of US and European banks revealed financial pressures that might otherwise have remained hidden. While corporates are obliged to report more detailed financial ratios than banks, cash management specialists at Wall Street Systems believe corporate stress tests could help treasurers make the case for more balanced financial structuring.

The stress tests recently conducted by the Committee of European Banking Supervisors (CEBS) revealed that seven out of the 91 banks tested had failed the rigorous test it set to gauge their financial strength. This stress testing will be repeated every two years and echoes a similar test by US and Swiss regulators, and is being adopted in other jurisdictions to test the financial stability of their banking systems.

“Corporations typically measure risk in a decentralised manner – looking at individual pockets or silos of risk independently without trying to bring all of the pieces together into a more holistic view. While it would have to be tailored to corporation and sector, a corporate version of the banking stress tests could be a useful tool in the armoury of a corporate treasurer,” said Tom Nelson, a cash management specialist at Wall Street Systems.

Wallstreet has developed some guideline questions corporate treasurers should be asking themselves to better determine risk holistically:

  1. How well could your company survive a 10% depreciation or appreciation in your main trading currencies – namely those in your home territory and those of your main customers and suppliers?
  2. How well could your company survive a 25% increase in the interest rates charged on your variable rate debt?
  3. How quickly can your company identify and replace all its relationships with one of your leading banks in the event of a run on that financial institution?
  4. What percentage of your company’s debt will need to be rolled over or replaced in the next 12 months?
  5. What would be the impact of one of your company’s top three customers becoming insolvent?
  6. What would be the impact of one of your company’s top three suppliers becoming insolvent?
  7. How much finance do you have extended to your company’s top three suppliers and/or customers?
  8. How well are you able to survive a major supply chain disruption such as a port strike, aviation disruption (like the ash cloud) or natural disaster?
  9. How much of your company’s costs are impacted by variations in raw material prices? How well is this hedged?
  10. How well could your company withstand a 10% increase in its pension fund contributions?


Related reading

New consumer banking head for Citi Asia Pacific