I went to a very interesting seminar this week for Non Executives focused on treasury and financial strategy and how to avoid dealing with risky banks. I met some companies that are actually doing quite well and are thinking it’s time they started asking their bank for some guarantees on their deposits. What a turn of events that would be!
The graphs from the Bank of England and slides shared at the seminar by ACT (The Association of Corporate Treasurers) actually demonstrated that bank lending was down in the UK in 2009 by up to £20billion in one quarter and bond issue volumes are up.
There was a lot of guidance given about the importance of Security, Liquidity and Yield in that order, or SLY for short. It’s a shame that the banks have not adopted this strategy and left the country in such a mess. We can also see that many organisations focused clearly on Yield only when choosing to deposit their funds in Icelandic banks where credit ratings had fallen albeit from A to BBB in Spring 2008, before the bank defaulted in October 2008.
Some of the valuable advice given clearly warned against dealing with foreign subsidiaries of banks where the parent bank may be under no obligation to bail them out if in trouble and to check ratings to assess the willingness and ability of governments to support their banks. Other strategies included whether you deposit your funds with the banks that would not be allowed to fail and making sure you do a proper credit assessment.
Their analysis from Moodys demonstrated the lower the credit rating the bigger the spread on the commulative credit default rates of up to 68% for Ca-C rated institutions. However what was more interesting was that over a 20 year period to 2006 all credit rated institutions for all categories showed an increasing level of cummulative default rates, clearly demonstrating that deciding where you to put your money has become a riskier activity.
There was a view from some attendees that given all the private equity firms sitting on huge piles of cash that have not done any merger and acquisitions in a while that it is time for some innovation in the lending market. Could these private equity firms start to consider some innovative lending scheme to help out Enterprise Britain? Let’s face it the good old days of highly leveraged buy outs are no more so they need to reinvent themselves. Alternatively there are some companies out there thinking that they could form their own type of credit union and look at some innovative schemes to pool their shares and lend to each other in which case the banks would be left out in the cold.
I would be interested in the views of those private equity firms and banks out there on the opportunity to innovate and bring some new lending products into the market.