If one of your relationship banks was investing unethically or involved in a banking scandal, would your company end its relationship with that bank? This is a question that might raise a few eyebrows among corporate treasurers around the world. Some corporate treasury departments might prioritise their company's financial requirements – cash management and payment services, credit lines or FX services – rather than evaluating a bank on considerations that don't directly affect the corporate-banking relationship. Other companies might take a different view on matters that could pose a serious threat to reputational risk.
Who are you partnering with and why?
One of the biggest environmental and ethical battles in the US in recent years, together with one of last year's high-profile banking scandals, has pushed some municipal entities in the US to reconsider their banking relationships on ethical grounds. In December last year, Minneapolis City Council, in Minnesota, announced its intent to review its relationship with banks that invest in the fossil fuel industry and in projects such as the Dakota Access Pipeline. Minneapolis City Council Member Alondra Cano said in December: “As we look at the ways our city invests, we want to be careful about who we are partnering with and why.” And the mayor of New York, Bill de Blasio, also took action by sending a letter expressing concern about the pipeline to the 17 banks involved in financing the project.
Weighing up reputational risks
While Minneapolis is currently considering the fate of its banking relationships, another US city took more decisive action. The City of Seattle, in the US state of Washington, recently fired one of its key relationship banks, Wells Fargo, withdrawing $3 billion-worth of business from the bank. The primary reason cited for this costly split, reported to be worth $1 million to the bank, was Wells Fargo's account-opening scandal in the latter half of 2016, in which the bank's employees opened accounts and issued credit cards without customers' consent. Wells Fargo was also involved with the Dakota Access Pipeline, which it provided with financing although it wasn't the lead bank on the financing programme and provided 5 per cent of the finance. Global Trade Review (GTR), journalist Melodie Michel writes that “The truth is, Seattle’s decision appears to be a knee-jerk reaction – most likely with political motivations – more than a well thought-out step to benefit the city’s residents.”
Transferring business from one bank to another is complex, time-consuming and costly. Smaller banks may be able to provide assurances on ethical investing but can they offer the same scope of services at the competitive prices of larger banks? These are tough choices for those in charge of maintaining corporate-bank relationships but when reputational risk has serious consequences all along the financial supply chain, it's something corporate treasurers can't afford to ignore.
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