Banks and Airplanes
January 31, 2013 by Magnus Lind
We may finally be entering upon a long-awaited game change in the provision of corporate financial services. For the first time, corporations are concluding that can’t rely on the banks for funding in the same way that they could prior to the crisis, although the change is not the fault of the banks themselves.
The growing unreliability of banks for funding is due to the tendency of the most recent financial regulations to push corporate funding off of banks’ balance sheets, while at the same time many banks are being obliged to back out of existing funding facilities and scale back their international ambitions. On top of this, quite a few banks are structurally weak. The traditional concept of a company having a core banking group and maintaining long-term relations with that group, such that the company could rely on the bank to support the company in times of stress, is no longer valid. As a result, companies no longer feel an obligation to give their core banking group all their auxiliary business, e.g., cash management. Companies are also concerned that recently introduced (and upcoming) regulations may lead to unintended consequences that are impossible to foresee. All in all, companies are concluding that to rely on banks for all of their financial service needs may be too risky.
The growing unreliability of banks for funding is due to the tendency of the most recent financial regulations to push corporate funding off of banks’ balance sheets, while at the same time many banks are being obliged to back out of existing funding facilities and scale back their international ambitions. On top of this, quite a few banks are structurally weak. The traditional concept of a company having a core banking group and maintaining long-term relations with that group, such that the company could rely on the bank to support the company in times of stress, is no longer valid. As a result, companies no longer feel an obligation to give their core banking group all their auxiliary business, e.g., cash management. Companies are also concerned that recently introduced (and upcoming) regulations may lead to unintended consequences that are impossible to foresee. All in all, companies are concluding that to rely on banks for all of their financial service needs may be too risky.
The corporate sector is therefore reevaluating its banking relations. This will not mean that companies will drop their banking partners outright, but it does open up space for new entrants and new models for delivering financial services. I believe we can expect to see the same change in the financial markets as we’ve seen in the airline industry in the past 25 years, with new players and increased innovation. Loosening the close ties between corporations and their bankers has opened the door to this change.
This change is something that the banks have wanted to avoid but that the regulators have been pushing for. Effectively it means that the banks’ stranglehold/monopoly on the distribution of financial risk and of savings has been partly broken. Obviously this will lead to increased systemic risk in in the world economy, which is one unintended consequence of the new regulations.
