TOOL 1.0
INTERNAL BANK
The extent to which this is a source of “red flags” depends on the type of transactions in which the bank is involved e.g. money transmission and trade finance banks tend to have an advantage over syndicate member banks. Depending on the type of banking service being provided internal danger signals may include the following.
| Treasury | • Increased pricing accepted • Interest hedges terminated early at a loss • The borrower has an aggressive reputation in the financial markets • It is difficult to reconcile the need for GFM facilities with their use • Impression given that the senior management lack understanding and control over the use of derivatives |
| Account Statistics | • Excesses of limits perhaps indicating unexpected financial needs or poor cash management • Sudden or excessive borrowing which differs from historical patterns • Continued high borrowing after season ended • Diminishing turnover in the account but an increasing level of usage of borrowing facilities (hard core?) |
| Unusual Transactions | • Unclear credit need for facilities • Round amount payments to creditors suggests payment plans agreed with creditors • “Cross firing” cheques, i.e. drawing cheques between two or more banks and against uncleared funds • Use of post-dated cheques • Unusual large cash transactions especially if with new counterparties / countries • Returned cheques/payments inward and outward • Early repayment of facilities with toughest conditions (allows raising of additional debt) • Requests for bank guarantees |
| Back Office / Business Support | • Frequent errors in payment instructions / Refusal to accept trade documents with small discrepancies • Large increase in trade / credit enquiries • Back office poor administration in the company (growing too fast?) • Drop in reporting quality/frequency • Delays in receiving confirmation of treasury transactions and documentation completion • Covenants in loan documentation broken |
| Industry / Client Knowledge | • Downgrade by Banks research departments on industry and client. (NB equity vs. industry) • Problems experienced by competitors who are also our client |
| Relationship Issues | • Delays in responding to contact • Client working with a large number of new banks • Client wants to leave a bank with which it has a long-standing relationship? • Major difference in terms and conditions given to different bankers |
