Bank Volatility Reaffirms the Need for Bank Scorecards
Bank scorecards have largely fallen by the wayside in recent years. Part of the reason why they are largely forgotten is because of the level of effort involved in manual data collection across multiple banks, as well as continued updating and maintenance. The process can take up to a week’s worth of time to update on a monthly basis.
But with SVB’s recent collapse and other financial institutions like Credit Suisse and First Republic suddenly struggling, CFOs are reverting back to this tried-and-true method of evaluating banking partners for counterparty risks.
In this blog, the latest in our Value Engineering series, we will explore the value of a bank scorecard to mitigate counterparty risk, with a few tips on how to build one.
What Is a Bank Scorecard?
A bank scorecard is the forgotten yet most valuable risk mitigation tool in the treasurer’s toolkit and has reemerged as a top request of board members from CFOs. Simply put, this scorecard enables the treasurer to assess the performance of bank relationships, the organization’s exposure to them, levels of commitment and fees paid to each. In 2008, it emerged as a must-have and continuous best practice. However, over the past decade the practice has not been viewed as a priority and has been mostly dismissed. The SVB contagion and global banking volatility has brought the practice back to the forefront of regular reporting and analysis.
Figure: A real-life example of a bank scorecard used for reporting counterparty risks during the 2008 economic crisis
Why Use a Bank Scorecard?
- Risk Management: A bank scorecard helps treasurers evaluate the risks associated with working with a particular bank. It enables them to identify potential risks and take necessary steps to mitigate them. Some of these risks include counterparty exposure, bank footprint and “stickiness” services utilized by their company. Basically, it allows treasurers to assess how quickly they can switch services if needed.
- Performance Evaluation: A bank scorecard helps treasurers evaluate the performance of a bank based on a set of predefined criteria. This evaluation helps them make informed decisions about the banks they work with and their level of engagement. The criteria include financial performance, investment portfolio as reported by the bank, credit rating and non-G-10 bank global exposure.
- Benchmarking: A bank scorecard enables treasurers to benchmark banks against each other, which helps them identify the best banks to work with. This is one of the simplest exercises to undertake. How well does each bank perform in the services they render and how does that compare? For example, depository services, disbursements, risk management, capital markets, economic advisory—all are at minimum weekly conversations with the treasurer and their top tier banks.
- Relationship Management: A bank scorecard helps treasurers manage their relationships with banks. It provides a structured approach to measuring performance and identifying areas for improvement, which can help strengthen the relationship between the treasurer and the bank. Basically, how do you divide the pieces of the pie? The bank provides commitments within your syndication, in turn they expect a return on their commitment. An evaluation of commitment vs. services rendered and fees paid is a great starting point to the conversation when syndication renewal or limits are evaluated with your banking relationships. Here is your piece of the pie and the fees we have paid to you vs. the commitment you have placed.
How Does Treasury Technology Help?
Since the biggest challenge of building and maintaining a bank scorecard is data collection and consolidation, the use of a cloud-based treasury platform can help, especially if such a platform also enables API integration with third party investment platforms and market data providers. This way, treasurers can use the systematic reporting and real-time dashboard features provided by the platform to get insights in minutes reliably and on demand. In particular, I can see a treasury management system brings the following value to the bank scorecard process:
- Data Collection and Analysis: A TMS can collect and analyze data from various sources, including banks, to provide treasurers with a comprehensive view of their banking relationships. This data can be used to develop and track key performance indicators (KPIs) that are used in the bank scorecard.
- Automated Reporting: A TMS can automate the reporting of KPIs, making it easier for treasurers to track and compare bank performance over time. This saves time and ensures accuracy in the data reported.
- Risk Management: A TMS can help treasurers manage banking risks by providing real-time visibility into banking activities, such as cash flows, foreign exchange exposures, and interest rate risks. This information can be used to evaluate the risk profile of banks and inform the risk rating on the bank scorecard.
- Compliance: A TMS can help treasurers ensure compliance with internal policies and external regulations related to banking activities. This includes monitoring bank fees and charges, adherence to credit limits, and compliance with KYC (know your customer) and AML (anti-money laundering) regulations.
Simply put, a TMS will enhance a treasurer’s ability to monitor and evaluate bank performance, which is essential for counterparty risk management.
Next Steps to Evaluating Risk Exposure in Real Time
Clearly based on history, as well as recent events, a bank scorecard is one of the simplest yet most valuable risk management tools in the treasurer’s toolkit. However, it is not easy to develop and maintain due to the large amount of bank data that has to be manually collected and constantly updated across the banks. The essential evaluation to consider whether you need one or not is heavily dependent on your banking footprint, inclusive of global exposure and the need to be bank agnostic in times of unstable credit risk.
In 2008, I was asked to build a bank scorecard and I remember 90% of my effort was spent on data collection across account status at five main banks and exposure of fifteen money market funds at different banks and FIs. Last week, when a client called me up for a few tips on a bank scorecard requested by his CFO for board reporting, I could simply guide him to create a dashboard on the Kyriba platform with all the data he needed literally at the click of a button.
If you are a treasurer and are in the process of data collection and updating to report the counterparty risk, now is the time to leave a disparate and labor-intensive analysis behind and take the next step to put in place a practice to evaluate your exposure in real time and within a platform.