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New Banking Crisis with Impact on Credit Management?

Silicon Valley Bank and Credit Suisse collapsed and were taken over by other banks. What is going on with our banking system and what are the consequences for credit management?
Schumann Insights
, Prof. Dr. Matthias Schumann

Banks in Crisis?

The Fed's rising key interest rates, as well as the ECB, are causing credit institutions that have deposits in bonds to incur losses when they sell the bonds, as customers demand liquidity. The same applies if companies refinance themselves more expensively on the capital market than they receive interest on the bonds. Again, if customers fear for the safety of their deposits, this can lead to a bank run, resulting in massive liquidity problems at the banks. In particular, if among themselves, faith in the stability of the individual banks is lost.

Consequences for Companies

Basically, the realized deficits in the banking world lead to fewer opportunities to extend loans themselves. As a result, financing for companies becomes scarcer. Investments must be postponed and closing short-term financing gaps can become precarious. If financing fails to materialize, the worst-case scenario is insolvency.

Another aspect for companies is the rising interest rates on refinancing measures, as banks are pricing their own now more expensive refinancing costs into their loan offers. This results in significantly higher interest charges for companies, with negative effects on corporate earnings.

Likewise, the existing inflation must take into account the investment and consumption need of affected industries. The effects of inflation lead to restraint on the part of customers, which in turn results in cancelled or postponed sales. This, in turn, will ultimately lead to a downgrading of the respective company ratings in the event of poorer sales prospects for the affected companies, as it will usually not be possible to adjust costs in parallel with declining sales. The companies' margins will suffer. At the same time, there will be a downgrade in the companies' ratings. Ultimately, there are two effects associated with this: In the case of new loans or adjustable terms, lending rates will rise and/or the volume of credit extended will be reduced. Overall, the companies affected are thus in a worse economic situation. In the medium term, this will be reflected in a higher insolvency rate.

For companies that use trade credit insurance to secure their receivables, for example, there will certainly be cases where the insurance company will try to reduce the default risk by cutting the secured limits. In extreme cases, limits will be cancelled. This in turn, if no adjustment is made, will lead to increased risks on the supplier side. In factoring, reductions in purchases by factoring donors are also likely to occur.

Taking all this into account, it is necessary for credit management to focus its analyses in particular on companies for which credit prolongations are pending or which are active in sectors that are struggling with declining sales and/or particularly with cost increases. Here, it is necessary to check whether sufficient liquidity reserves are available, cash flow is positive, and measures are being worked on to adjust sales and costs. In this way, it will be possible to identify the areas in which sales can be generated for which invoices are also paid or where disruptions are to be expected in this process.

About the author
Prof. Dr. Matthias Schumann

Since 1991, Prof. Dr. Matthias Schumann has held a professorship in Business Administration and Information Systems (Chair of Application Systems and E-Business) at the University of Göttingen. He also heads the joint computing center of the Faculty of Economics and the Faculty of Social Sciences. He is a shareholder of Prof. Schumann GmbH.

Prof. Schumann's research interests include information systems at financial service providers and systems for credit management, as well as issues related to knowledge and education management. Prof. Schumann has a wide range of experience in consulting companies, extensive lecturing activities and more than 350 publications.

University of Göttingen

Matthias Schumann q