Counterparty Risk Concerns Today’s Treasurers

CFOs, treasurers, analysts, and other financial management decision-makers have made in-roads in mitigating risk by increasing restrictions on which banks can hold their uninsured deposits and updating their investment policies frequently. But despite progress in both understanding and managing counterparty risk, many organizations still do not appear to have formal counterparty risk exposure policies or frameworks in place, nor do they appear to be able to adequately aggregate, analyze, and monitor their counterparty exposures.
These were two of the major findings revealed in the fourth annual Liquidity Risk Survey, a study of short-term investment, debt, and forecasting practices conducted by Capital Advisors Group, Inc. and Strategic Treasurer LLC. The 2014 survey, the results of which were released on May 6, 2014, elicited responses from 112 treasury and finance professionals, including CFOs, treasurers, assistant treasurers, vice presidents of finance/treasury, managers or directors of cash investments, and treasury/cash managers and treasury/cash analysts. Respondents spanned companies ranging in size from over $10 billion in annual revenue (21 percent) to those with less than $500 million (29 percent).

Progress in Some Areas of Risk Mitigation

Bank ratings have declined significantly since the financial crisis. In 2008, 60 percent of the top 20 U.S. banks received Moody’s ratings of Aa or better. This year, only 25 percent rank that high. Similarly, in 2008 Moody’s didn’t rate any of the top U.S. banks at A3 or below, whereas today 40 percent fall into that range. (See Figure 1.)
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