Most companies evaluate their banking relationships, but few take into account the rules and strategic risk parameters used by banks to determine their profitability on your relationship.

Key issues

A banking relationship is a complex yet subtle relationship. How is it best defined? Is it based on long-standing ties or  a personal relationship? Does it evolve over time from mutual trust and confidence? Perhaps it is political or administrative in nature? Or, is it simply a chosen or long-endured relationship?

Regardless, a banking relationship is always based on performance, risk and profitability.

The U.S. Basel III final rule represents the most complete overhaul of U.S. bank capital standards since the U.S. adoption of Basel I in 1989. Banks are now more stringent and have increased profitability expectations.

Since banks are using performance measurement tools to assess the value of corporate relationships, it is logical that their corporate clients use the same metric.

How Redbridge can help you

  • Based on a proprietary model for risk adjusted return on capital (RAROC) calculations, Redbridge will improve your understanding of your bank’s profitability on your relationship and assist in your monitoring capabilities, while giving you more control of your overall banking relationships.

    With our analysis and tools, finance and treasury teams can ensure their banking relationships remain robust and stable and can quickly identify problems that could negatively impact their financing capacity or damage their banking relationships.

    Obviously, a bank satisfied with its relationship with a client will be more likely to offer it financing in the future relative to those corporate relationships that fall short of the bank’s profitability targets. This approach makes even more sense in the prudential context of Basel III, which encourages banks to be more selective in their equity allocations.

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  • In addition to assessing the overall relationship, a RAROC analysis can be used to prepare for future bank financing negotiations. It is particularly useful for assessing the bank’s level of commitment and service to which the treasury group is entitled from its partners. It creates clarity for banking relationships, giving treasury teams a benchmark for costs and services by allowing them to accurately gauge not only a bank’s overall profitability on a relationship, but the marginal difference in profitability considering different financing terms and conditions.

    Redbridge will measure and benchmark all of your global bank fees to ensure a fair balance between fees paid and services provided. The process typically generates substantial savings for our clients.

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