libor scandal

The powers granted to the Cypriot Central Bank last week give it the authority to convert current account funds into taxable deposits meaning corporates are caught up in the debacle. A precedent has now been set that no bank customers can assume that their funds will be protected in a collapse. The role of the IMF in Cyprus is also noteworthy indicating a global shift in thinking on bank failures.

Companies should move now to safeguard their position. They need to have a clear view not only of their cash balances but also understand clearly how collections (payments from customers) are driven. Where are the funds coming from? How are they collected? Where are they going to? In other words how much control have they got of the collection process and ultimately the funds?

Most organisations collect revenue from multiple sources on a daily basis. Some of these payments are generated by the customer (i.e. credit transfer), some are generated by the company (i.e. direct debit) and the rest can be generated in a multiple of ways depending on industry sector.

Companies need to understand clearly the flow of funds into their organisation so that steps can be taken to protect revenue in the event of a banking collapse. In a future bailout scenario bank account funds might be frozen and capital controls put in place. In anticipation of such a scenario, companies must first and foremost be able to divert funds immediately to another bank account, maybe one in a different jurisdiction.

New financial control measures should see the control of inward payments being taken by companies from their customers. Payment methods should switch where possible from credit transfer by the customer to direct debit by the company. This will give companies greater visibility of which banks the funds are coming from and the more capability to redirect incoming payments at short notice if necessary.

The level of risk for bank customers has changed dramatically post the Cyprus bailout. Contagion is a real risk and the consequences could be devastating. The Cypriot deal sets a precedent that customers must now accept more risk when they leave cash in bank accounts. This will have immediate ramifications for banks in the financially weaker Eurozone countries. The greater risk factor now will inevitably mean bank depositors in those countries will seek higher interest rates putting a new squeeze on banks’ margins.  

The finances of Greece, Portugal, Spain and Italy remain vulnerable. Ireland appears to have turned a corner and it should not require a further bailout. However, if uncertainty created as a result of the Cyprus deal leads to ‘panic withdrawals’ of deposits from banks, further capitalisation of the banks in these countries might be required. If this requires another bailout or a restructuring of existing bailout terms, then corporates might be forced to take a hit.