Capital Markets

Battered But Not Broken

Tightened underwriting has strained the relationship between banks and CFOs, but few seem ready to look elsewhere.
Vincent RyanOctober 1, 2008

CFOs and banks are still talking, but the relationship is rockier than it has been in some time. So suggests a CFO survey of finance executives at 268 companies. Since the onset of the credit crunch, 28 percent of finance chiefs, for example, are more closely monitoring the health of their banks. And although only 3 percent of respondents have switched primary banks, 11 percent have enlarged their stable, primarily to guard against concentrating risk at one institution.

Refinancing activity has been brisk — and, often, a white-knuckle ride. Banks exacted wider spreads, required more collateral and equity, and, in a handful of cases, added a new wrinkle to respondents’ lending terms: market-based pricing, which links a loan’s spread to the performance of credit default swaps (instruments that hedge against a borrower defaulting). Existing corporate lines of credit may become the next source of stress. Almost 75 percent of companies surveyed have 50 percent or less tapped (see “Line Drawing” at the end of this article). While those open lines are a good safety net for companies, they could exacerbate balance-sheet pressures for banks.

CFOs, though, have no wish to add to banks’ travails. Compared with a CFO survey conducted in March, more finance chiefs in this survey (conducted in August) think lax regulation by the Federal Reserve and others contributed to the credit crunch — 84 percent, up from 69 percent. But they have a very measured view of how much the federal government should tighten oversight. While there is support for firming up mortgage-lending standards and demanding transparency in structured products, only 8 percent of respondents think banks must uniformly hold more capital against their obligations. As to whether to rescue failing banks, CFOs were split. About 53 percent said the Fed should not play savior with financial institutions it deems “too big to fail.”

Vincent Ryan is a senior editor at CFO.

Click here to see the results of our survey.

Percentage of revolving lines of credit currently drawn down

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