Counterparties: A question of trust
The financial crisis has prompted corporates to scrutinize more closely the risk presented by their bank counterparties. Laurence Neville reports.
FOR CORPORATES, THE financial crisis that erupted in September 2008 brought to the fore an issue many had scarcely considered in relation to their bank providers: counterparty risk. The implosion of Lehman Brothers demonstrated for the first time in a generation that big-name banks can disappear, with all the negative repercussions that entails for their clients.
In the months that have followed, some banks have lost business as corporates have reacted to concerns about their solvency and sought to diversify the risks presented by their treasury providers. More generally, counterparty risk has been elevated to a board-level concern – for a while in the autumn it was all boards talked about – bringing an enhanced role for corporate treasuries.
"Counterparty risk was not perceived as key risk until the crisis," says Vineet Sood, head of treasury at IT services and outsourcing company Tata Consultancy Services in Mumbai, India. "After the events of September and October we immediately determined to reduce our counterparty and concentration risk."
Implications of a counterparty crisis
The long-term contracts for many treasury activities such as cash management mean that in many cases corporates were not able to react immediately to the banking crisis.