Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].
Context: The crisis of confidence ignited by the flameout of Silicon Valley Bank prompted finance organizations at multinational corporations to ask a plethora of probing questions about bank counterparty risk and the safety of corporate cash. Though some questions have been answered and appropriate actions taken, ongoing fears around midsized regional banks like First Republic are causing treasury teams to continue to seek guidance from peers and subject matter experts about the way forward.
- Those experts include several former bankers who now offer their insights to NeuGroup members, including Jerry Olivo, former head of intraday liquidity at Citi treasury, who provided the first answer to the member question below.
Member question: “When assessing counterparty risk, do you analyze at the level of the bank group or at the level of the individual branch where the cash deposits are held?
- “We are preparing a counterparty risk analysis report and our treasurer asked whether we should be looking at the bank level or at the individual branch level, where we actually have our deposits. Curious to learn how others look at this.”
Jerry Olivo, NeuGroup Senior Executive Advisor: “Your counterparty risk should usually be at the bank legal entity level rather than at the branch level. If the branch is outside of the US, you should review account terms and conditions to determine if there are conditions that would limit recourse to the US bank entity of which it is a part. I believe that’s rare, but I have seen it.”
Peer Answer 1: “Unless the branch falls under a banking subsidiary under a different name but the same holding parent bank and there is corporate separateness, in my opinion, there is not much benefit to looking at it at the branch level.
- “We developed a counterparty risk dashboard for each banking partner that tracks deposits and pulls five-year CDS market spreads and bank-specific credit ratios. If you have an investment portfolio and invest in bank CDs or CP or short-term bonds, I recommend you go a level deeper and look at your [financial] investment security exposure with any of the banks as well.”
Peer answer 2: “Ditto as the responses above—you do not need to go down to the branch level, because an individual branch will not default. For high risk countries, we do look at it on a country basis, because it’s possible that a bank could declare default in a specific country (but rare, and that would likely only be if the whole country was in crisis and the bank was being forced to default there, e.g., a Venezuela type situation).”