BankingRisk Management

SVB Shockwaves: Updating Bank Counterparty Credit Risk Strategy

By June 28, 2023No Comments

NeuGroup Research survey results on the repercussions of the SVB collapse for corporates managing risk.

The immediate flurry of activity by corporates in the aftermath of Silicon Valley Bank’s first-quarter collapse has subsided. But as the second quarter draws to a close, new NeuGroup Research shows the crisis of confidence ignited by SVB will have long-lasting implications.

  • Preliminary results of the Best Practices in Assessing Bank Counterparty Risk Survey reveal the crisis has triggered a reassessment of bank counterparty credit management at 81% of treasuries, and 69% are planning to make fundamental changes to how they mitigate bank credit exposures going forward. The chart below describes their key risk mitigation strategies.

Safety in numbers. The most common forward-looking strategy under consideration is greater deposit diversification. “We are increasing the number of counterparties to enable us to reallocate funds quickly within our risk limits, if needed,” wrote one respondent.

Safety in size. However, diversification comes with a caveat. In the “other” category, one respondent reported his company is planning to concentrate deposits with GSIBs.

  • The survey also found that 40% of treasurers who took immediate action redeployed funds into core banks, and 30% shifted deposits out of small banks.
  • Some excess funds were also diverted to government MMFs in the immediate aftermath.

Plan B. The next most popular medium- and long-term strategy treasuries are considering is hedging against operational risk by establishing a back-up cash management bank. That means not only selecting a partner but opening accounts, so there’s an immediate alternative for accepting and making payments.

  • Getting set up with an alternative institution requires internal work as well. “We’re adjusting internal platforms to more easily replace existing bank partners for key operational risk and customer financing programs,” commented another survey respondent.

Additional activities. Treasurers are taking other measures to backstop bank credit risk, including by increasing sophistication in selecting counterparties for derivatives transactions and maintaining a higher level of cash in government money market funds.

Thinking beyond deposits. Essential to planning risk mitigation strategies is the definition of exposure. Not surprisingly, 100% of members include deposit exposure, and 70% include exposures to in-the-money derivatives.

  • Next in line (58%) is exposure to investments in bank CP or other instruments. However, less than half are taking funding risk into account, and just 26% include their exposure to banks as customers in aggregating their risk.
  • With counterparty credit becoming a broader theme in this market environment, treasuries may have to reconsider how to better aggregate risk across exposures.
Justin Jones

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