Counterparty risk takes centre stage as banks brace for potential crisis

Large companies are spreading out their counterparty risk and increasing screening of their banking partners in response to the recent banking crisis that has been a "wake-up call", according to an industry survey to be released on Thursday.

Worried that possible future bank failures could leave them unable to trade or cause short-term liquidity crunches that could impact payroll and supplier invoices, 88% of companies are looking to increase their number of foreign exchange counterparties, according to the 2023 MillTechFX survey of 250 finance executives in North America.

Multinational companies and those with sales overseas use banks, or counterparties to the transactions, to trade foreign exchange and hedge currency risk.

"All of a sudden there's a wake-up call," said Eric Huttman, CEO at MillTechFX, the specialist currency arm of Millennium Global.

Huttman said his firm has added dozens of clients since the banking crisis and all of them have spent more time asking about its counterparty selection process.

"[They want] to make sure that we've done our homework and have an institutionalized policy in place, because ultimately, they are trusting us to do that," said Huttman. "And that they can have multiple banks."

New way of bank screening The failure of several regional and mid-sized US lenders earlier this year roiled global markets, sparking fears of contagion risks in the industry. In Europe, UBS acquired rival Credit Suisse after the Swiss government orchestrated a rescue plan.

Amol Dhargalkar, managing chairman at hedge advisory firm Chatham Financial, said events like these unveil new areas of focus for market participants, and that companies are creating more sophisticated ways to screen banks.

For instance, they are digging deeper into financial disclosures to better understand banks' securities portfolios and whether there are any embedded losses of concern. Banks' exposures to commercial real estate lending, their credit default swaps and how much interest rate risk they have are also data companies are requesting.

"The broad questions that companies are asking are, is my banking partner sound and will they be there when I need them," said Dhargalkar.