Bank downgrades are a challenge for Trustees & Treasurers

The UK’s Co-operative Bank has moved quickly to repair its management and governance after ratings agency, Fitch, downgraded the Banks’s debt last month. Its bonds, PIBS and preference shares have fallen, with expectation of a write down or bail-in involving those lenders, but not depositors. The Bank has reassured investors that capital currently exceeds regulatory requirements, against a background of concern on impairment. Press comment has also reassured personal and other small depositors, highlighting the £85,000 state guarantee for individual accounts.

The Co-operative Group stands behind the Bank, which will reassure the many larger charities, county councils, universities, unions and companies that have much larger sums on deposit and will not be covered by the guarantee. However most of these organisations also have governance and fiduciary responsibilities. These typically result in prudent criteria being set as policy for an organisation’s deposits. That might involve requiring a spread of banks and deposit takers to be used, or setting maximum limits on the size of any individual deposit. And, usually such a policy sets our credit rating requirements. Indeed all organisations with external stakeholders typically have a basis for engaging in credit risks with other counterparties. The largest organisations may be able to justify full credit checks, but many others simply rely on publicly reported credit ratings.

That is why the Fitch downgrade may have implications beyond the bond holders it was designed for. Whilst the rating highlights risks for bond and preference holders, rather than representing any advice to depositors, it will be considered by many institutional depositors as a factor in their treasury management policy. (example) Trustees and others entrusted with governance may be wise to dust off their rules on deposits.

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