Banking Relationship Concerns
April 30, 2009 – 5:29 amFor 50 years, commercial lending in America was a buyer’s market, with many sellers—the U.S. banks—chasing available buyers—their corporate clients. This happens when an industry is experiencing economic competition and there is too much supply of product for the market to absorb. Sellers often cannot make an adequate return on their investment. Corporations were in charge, and banks wined and dined them to sell their wares. Every time a piece of business was put out to bid, a dozen or more banks scrambled to write proposals, cut prices, and promise implementation support, superior customer service, and visits by senior management.
The New Seller’s Market in Banking
The ending of interstate banking restrictions and the passage of the Gramm-Leach-Bliley Act (1999) gives banks, securities firms, insurers, and finance companies the freedom to assign capital to any financial service. And as rational managers, they will seek the greatest returns for their shareholders. In fact, past strategies were often suboptimal, in that they were made in the context of severe restrictions on their freedom in assigning capital. Banks had to lend money to corporate customers on terms that were not always attractive, because they were restricted to the banking business.
Commercial banks today are in a seller’s market for the financial needs of large corporations. They have the capital to lend or invest, and treasurers must go to them, hat in hand, and ask for consideration. Some banks are turning away borrowers, or are being extremely selective as to the businesses that they will support, while others are demanding higher prices, more revenue, and greater returns. (See, for example, “Who’s Getting Hurt by the Loan Drought,” BusinessWeek, May 20, 2002, pp. 122–123.) Exhibit 10.1 shows returns to the bank when a credit line is used or unused.
Taken From : Essentials of Managing Corporate Cash
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