Capital Markets

Are CFOs Getting Bankmailed?

Finance managers on banks: if you don't buy their cash management services, you don't get short-term credit.
Stephen TaubMarch 5, 2002

Banks have offered netting services to potential corporate customers for decades. Who knew netting also applied to reeling in many of those customers.

A large percentage of senior finance professionals say they are pressured to award additional business to financial institutions in exchange for short-term credit. What’s more, many of these finance managers expect adverse consequences from not awarding business to short-term credit providers.

Those are two of the startling conclusions to come from a survey of chief financial officers, treasurers and vice presidents of finance, conducted by the Association for Financial Professionals (AFP) and the Capital Markets Research Center at Georgetown University. The survey took place two years after Congress passed the Gramm-Leach-Bliley Act. That act deregulated the financial services industry, permitting commercial and investment banks to enter each other’s businesses.

The survey has additional significance in the wake of recent shareholder lawsuits alleging that Wall Street analysts and their investment banking colleagues work together to secure underwriting fees.

Among the survey’s findings:

  • Half of the survey’s respondents reported that they are “required” or “strongly encouraged” by their commercial banks to purchase cash management services in order to be offered short-term credit instruments.
  • Seventy percent of respondents from companies with annual revenues exceeding $1 billion expect a reduction of short-term credit if they do not award other business to the providers of that credit. 60 percent actually expect withdrawal of short-term credit if they don’t make a purchase.
  • Twenty-seven percent of respondents reported that they are “required” or “strongly encouraged” to use the debt underwriting services of their commercial banks in order to obtain short-term credit. Nearly one in five of the respondents said the same thing about their investment banks. At companies with annual revenues exceeding $5 billion, these percentages more than doubled for both commercial and investment banks.
  • Around 11 percent of the respondents are “required” or “strongly encouraged” to use the equity underwriting or strategic advisory/mergers and acquisitions services of their commercial banks that offer short-term credit. The figure was 16 percent for investment banks. Among companies with annual revenues exceeding $5 billion — companies which are more likely to use these services — the percentages more than doubled for both commercial and investment banks.

When it comes to awarding other business such as cash management and debt underwriting, respondents consider a bank’s willingness and ability to offer short-term credit to be a significant factor, according to the survey.

  • Eighty percent of respondents reported that they consider the availability of short-term credit “very important” or “important” when selecting cash managers.
  • Availability of lines of credit has decreased for more than 33 percent of respondents that currently use them, while 43 percent of respondents using backup lines of credit for their commercial paper program reported either a severe or moderate decrease in availability.

The survey was conducted from November 16 through December 3. A total of 3,562 financial professionals received surveys via e-mail, with 427 responding. >Thirty-three percent of the respondents work for companies with less than $250 million in annual revenues, while companies with more than $5 billion in revenue accounted for another 11 percent of the survey’s participants.

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