Global Fund Managers Intensify Bank Scrutiny After Crisis – Survey by Reuters

By Laura Matthews and Chiara Elisei

NEW YORK/LONDON – Global fund managers are actively seeking ways to mitigate counterparty risk, as many now routinely monitor the credit ratings of their dealer banks in the wake of the recent banking crisis, according to an industry survey released on Wednesday.

Facing concerns that potential bank failures could result in short-term liquidity challenges or disrupt foreign exchange services necessary for payroll and vendor payments, 80% of fund managers are exploring diversification of their counterparties, as highlighted by the 2023 MillTechFX survey.

MillTechFX, which is the fintech division of Millennium Global, conducted this survey with 250 senior decision-makers at asset management firms across the United Kingdom.

Fund managers rely on counterparties, like banks, to execute foreign exchange trades or hedge against currency risks. A failure of a counterparty could jeopardize their hedging strategies and the associated collateral.

The survey revealed that the percentage of chief executives focused on diversifying their banking relationships is even higher at 100%, indicating a strong desire from leadership to assess their banking frameworks to better prepare for future crises.

A previous survey from MillTech of North American fund managers indicated a similar interest in diversification.

“One significant takeaway for fund managers from the recent banking events is the necessity of having multiple counterparties,” said Eric Huttman, CEO of MillTechFX.

The collapse of various regional and mid-sized U.S. banks, along with the Swiss government’s intervention to facilitate the rescue of Credit Suisse by UBS, sent ripples across global markets.

In response, investors are intensifying their evaluation of banks and refining their cash-management practices to address vulnerabilities in their counterparty risk and liquidity strategies.

Huttman noted that while many firms may prioritize cost when selecting foreign exchange counterparties, the recent banking crisis illustrates that the reliability of settlement procedures is equally crucial.

TREASURY MANAGEMENT IN FOCUS

Executives from several asset management and advisory firms conveyed to reporters that fund managers engaged in private equity and alternative credit are enhancing their treasury and investment policies by incorporating a broader range of banks. They are establishing clear limits on the amount deposited with each bank and scheduling regular reviews of their policies and counterparties.

“It was not anticipated that some banks would encounter the levels of difficulties that they did,” remarked Matthew Pallai, chief investment officer at Nomura Private Capital. “Thus, it makes sense as a risk mitigation strategy to consider how best to diversify exposure to any particular counterparty.”

Danny Olds, a director in the treasury practice at a boutique consultancy, noted that the crisis in March sparked renewed attention to treasury management, an area that has previously been overlooked within the industry.

A software provider reported a rise in demand for treasury and liquidity solutions and analytical tools that evaluate the health of banks, offering real-time exposure metrics across multiple banks and highlighting areas of concern, including fluctuations in banks’ credit ratings.

Moreover, recent findings from a legal firm’s Private Capital Report indicated that certain private equity firms are acquiring financial products to rebalance funds across multiple bank accounts, ensuring they remain below the $250,000 FDIC insurance threshold.

“It wasn’t a priority for most until the events in March made it a pressing issue for companies with frozen accounts,” commented Jennifer Kent, a partner at the law firm.

(Note: This article has been amended to correct the description of MillTechFX in paragraph 3.)