• Tidak ada hasil yang ditemukan

KNOWING YOUR CUSTOMER

Dalam dokumen Erik Banks and Richard Dunn (Halaman 56-60)

The extension of credit (or the establishment of a non-credit financial relationship) is based, in the first instance, on the financial strength of the client. A client that is financially strong and demonstrates a clear “capacity” to make good on its obligations becomes a candidate for unsecured credit exposure and a broad financial relationship. A client that has strong financial resources but is primarily set up to manage funds using leverage and pledging its assets or a client that does not feature the necessary financial strength may, or may not, be worthy of a financial relationship. Though posting collateral can mitigate some of the obvious credit risk exposures that might exist, other issues – related to reputation and motivation – can arise and may skew these credit decisions. For instance, a client that posts collateral to enter into a derivative transaction to hedge exposure may be considered acceptable, while one that uses the derivative transaction to mislead regulators or confuse investors and auditors is certainly unacceptable – regardless of the collateral posted. Understanding these subtleties is vital! We cover the non-credit aspects of the business decision in Section 4.3.

A credit officer narrowly making a decision about whether to extend credit risk to a coun- terparty (or even deal with a counterparty on a non-credit risk basis) typically relies on tools such as official company filings (e.g. annual reports,10Ksand10Qsin the US, and so on), company meetings, equity or rating agency analyst reports, press reports and general hearsay;

one would assume that the first two are the most informative and accurate. We review detailed client risk considerations by splitting the counterparty universe into several categories:

r

Funds,

r

Governments and charitable organizations,

r

Other corporate counterparties, including financial intermediaries.

4.2.1 Funds

Most dealing with funds is based on collateral being pledged. It should not be concluded, however, that any fund willing to post appropriate collateral automatically becomes a good counterparty. There are at least three other elements that are critical to consider:

r

Is the fund the sort of organization that fits the client strategy?

r

Who else is doing business with the fund (and how)?

r

What legal issues surround the perfection of interest in the pledged collateral?

Mutual funds and unit trusts disclose reasonably detailed historical information (though rather infrequently); however, dealings with this community are not typically risk-intensive as they are mostly prohibited from borrowing and using derivatives. The credit focus is really on leveraged funds. We can conceive of splitting this universe into three categories of potential clients: the “top notch”, the “acceptable” and the “do not deal with”. This categorization is very subjective but can be determined by the corporate risk group by analyzing:

r

Performance track record;

r

Manager background and experience;

r

Dependence on a single or few individuals (e.g. key-man risk);

r

Investment strategy, infrastructure and controls;

r

Sophistication of risk analysis;

r

Size and stability of capital and investor base;

r

Historical dealings and experience with the fund, and so on.

A combination of performance results analysis, market activity review, regular on-site visits and telephonic contact is needed to reach conclusions. Credit-sensitive business with funds in the “top-notch” category can conceivably be conducted on fairly aggressive terms, whilst dealings with the “acceptables” should be based purely on standard haircut policy, with no exceptions. Those in the “do not deal with” category are best avoided. We believe that it is vital to distinguish between funds in such a manner and conduct business accordingly. It is also important that such a categorization be reviewed frequently. Funds typically have a return experience that follows a “bell curve”: when they start out they are “learning the ropes”;

then they start performing (if they have all the necessary ingredients); eventually, however, success catches up with them and they revert toward an average performance. As a result, we might argue that ceteris paribus, the life of a fund can have more and less risky periods! Daily behavior of the fund, as observed by salespeople, risk professionals and operational staff, can also serve as an important source of credit information. In-depth and real-time knowledge of the activities of a fund is almost non-existent unless a firm happens to be the sole prime broker – simultaneously the banker and custodian of the investments. This, however, is very rare. Funds, and especially leveraged funds, do not disclose much information about their dealings with other financial intermediaries for fear that it will be used against them. Again, the decision of whether or not to deal with the client, and on what terms, is very subjective. It is a massive game of poker. It must not be forgotten that LTCM was a “top notch” category client for almost everyone on Wall Street the day before rumors of its demise started circulating!

While a client’s financial strength is perhaps the most important factor in determining whether obligations will be repaid, its “willingness” to pay must also be considered. “Capacity”

relates to a client’sfinancial strength, while “willingness” – a much more subjective concept – relates to its desire to pay. As noted in the Orange County and P&G examples above, a very strong client that has the financial resources to pay its obligations (e.g. a governmental institution or well-funded corporation) may choose not to do so for any number of reasons – it may believe it has been treated unfairly by the banker (e.g. it has been “ripped off”), that the risk protection it sought failed to provide the benefits desired, that too much risk was embedded in a trade, that the valuations were wrong, and so on. Though it is difficult to know in advance whether or not a client will willingly honor its obligations (regardless of financial capacity), a firm must be alert to the possibility that transactions that have a great deal of risk, are very complicated or unusual, have a greater likelihood of being challenged by an unhappy client (typically in a loss position!). It is also true that the larger the potential loss the larger the potentiality of an impropriety claim, even if the financial agreements are straightforward.

Thus, it is critical to choose the types of clients to deal with and the different types of products that can be marketed. It is also important to make sure that senior officials within the client organization are truly on top of financial transactions and potential liabilities before, and during, the life of a financial arrangement.

4.2.2 Governments and charities

Governments, and government-related organizations, should be dealt with only after very care- ful consideration. Governments, being ultimately political as opposed to economic organisms, have a habit of doing abrupt “u-turns” as political winds change or political gain is being sought. They also find it easy to lay claim to the argument of the weak (Mrs Jones – the poor tax payer) versus the “strong and wicked” (the large bank or corporation), which fuels the press in many countries. It is not surprising that there is a long history of certain government entities

disowning loss-making transactions by claiming that the right people were not informed or authorized, that they were dealing outside of their legal scope (e.g.ultra vires) or did not understand the risk of the transaction(s) – in short, an “unwillingness” to pay, regardless of financial capacity. Examples such as the UK local authorities swap defaults, the Orange County bankruptcy and the Kingdom of Belgium currency losses mentioned earlier serve as important reminders. These events can very quickly become very public and embarrassing – much to the dislike of financial intermediaries and regulators. Non-profit organizations (e.g. religious foun- dations and pension funds) similarly have easy recourse to the public domain and should only be considered for business after very careful consideration. For these organizations regulatory oversight should be well understood but not relied upon as a simple means for concluding that official oversight is condoning their dealings.

4.2.3 Other corporations and financial intermediaries

For all other organizations, including corporations and financial intermediaries, it is increas- ingly true that the accounting profession does not provide us with the whole picture, as acutely highlighted in the Enron bankruptcy. The reputation of the accounting industry and its ability to provide objective and informed analysis of, and opinion on, a company’s true financial health have been temporarily – and perhaps permanently – impaired. Long gone also are the days when a well-established name would require less scrutiny. Analysis starts with measures of soundness of business fundamentals, diversification of sources of income, quality and sta- bility of management and the shareholder base, competitive environment, and so on. From there it moves to the financial statements. When it comes to the balance sheet, earnings and cash flow statements, disclosure rules, analyst reports and rating agency reviews often do not provide sufficient information to be able to see through the “financial conjuring” that goes on. In particular, not enough attention is paid to off-balance sheet activities and forward commitments. Yet these are both critical for an adequate analysis to be performed. For in- stance, with the focus on the Enron debacle, the press has picked up on the fact that many of the offshore off-balance sheet vehicles were not properly disclosed in the required filings (and those that were disclosed were done so in the most cursory way, buried deep in the footnotes of the statements). Lack of knowledge regarding forward commitments can, like- wise, lead to misunderstanding about future liabilities and liquidity constraints as well as earnings.

It is worth noting that retail clients are not typically granted unsecured credit exposures as they lack the financial strength to support such obligations. Accordingly, credit analysis does not assume the same importance as it does with institutional clients. However, although secured lending against assets in client securities accounts is reasonably standard practice, financial institutions must still take care to know their clients, make sure that products/transactions are suitable and that disclosure of potential risks is thorough.

It is important for a firm to rely on its own analysis and judgement when it comes to making credit decisions. Though external equity and debt analysts provide certain services, they have different motivations and have proven, on many occasions, to have “missed the boat” when it comes to critical downgrading decisions. For example, Merrill Lynch’s debt analyst issued a buy report on Russian rouble-denominated debt 10 days before the default! Such analysts are unfortunately also influenced by their own particular circumstances, as we have all discovered in the debacle involving the “independence” of research on Wall Street.

Against this backdrop, it is safe to say that over the past 20 years the role of the credit officer and the skill set required of a great credit officer have radically changed.

Dalam dokumen Erik Banks and Richard Dunn (Halaman 56-60)