Strategic leadership: the key to CFOs navigating banking volatility?

The recent volatility within the global banking sector has been a stark reminder of the critical importance of strategic leadership within the finance function if businesses are to survive.

Chris Ortega, a fractional CFO and CEO of Fresh FP&A, says the collapse of Silicon Valley Bank (SVB) and Signature Bank made it abundantly clear that many businesses were ill-prepared to weather the storm.

It exposed a significant lack of strategic leadership across various businesses, Ortega said in a recent interview with the CFO.

“One key insight in navigating this banking situation is many businesses, CEOs, founders, and business owners didn’t have the strategic finance leadership in place to proactively address this situation,” says Ortega.

Time to buckle up?

Since the collapse of SVB and Silvergate, along with issues at Credit Suisse and First Republic, economists and finance leaders predict current banking volatility has not peaked.

Paul Ashworth, chief economist for North America at Capital Economics warns that the worst-case scenario would be a “rolling crisis” that lasts for years – echoing the US Savings and Loan (S&L) crisis.

The S&L crisis ran from the mid-1980s to the mid-1990s across the US and saw the collapse of 1,043 out of 3,234 ‘thrift’ institutions – savings and loan institutions – costing the taxpayer around $130 billion.

“Fears over small regional banks in the US have focused on the unrealised losses on debt securities and deposit insurance but, maybe we should be more worried about deposit flight due to rising interest rates,” Ashworth says.

“Under those circumstances, the risk is that a pull-back in lending, particularly by small banks, triggers a downturn in commercial real estate which, in a worst-case scenario, could develop into an adverse feedback loop.”

Policymakers at the Bank of England (BoE) have said they are on high alert for further turmoil after recent bank failures, noting SVB was the fastest demise of a lender since Barings Bank in the mid-1990s.

Beyond banks: why diversification is the key to managing uncertainty

Echoing Ashworth’s sentiments, Ortega says the banking sector was yet to see the full impact of the developments in the sector.

In the meantime, Ortega cautions finance teams “must have a plan A, B, and C” around their treasury operations.

Given many of the businesses caught short by recent bank failures had only one source of funding, Ortega says it is now crucial for teams to diversify their treasury risk management. The “guiding principle”, he says, is to have two big banks and one small local bank.

“Also make sure you have the same functionality between them while utilising strategic fractional CFO leadership to help set up and scale your treasury operations,” says Ortega, adding that redundancy in treasury management was critical to ensure operations continue.

During the 2008 financial crisis, Ford issued $23.5 billion in new debt to refinance existing debt and diversify its funding sources. The bond sale included a mix of fixed-rate and floating-rate notes.

More recently, Marriott International issued $1.6 billion in bonds to refinance existing debt to navigate the impacts of the pandemic on its business. The bond sale included fixed-rate notes with maturities ranging from 3 to 30 years.

Similarly, Delta Air Lines issued $9 billion in bonds to finance its operations and repay existing debt. The bond sale included fixed-rate and floating-rate notes with maturities ranging from 1 to 40 years and was partly driven by the impact of pandemic on the airline industry.

In response to recent bank failures, corporates are likely to turn to bond markets, private debt, and even equity financing to diversify their funding sources once again. They could also explore alternative financing solutions such as trade finance, factoring, and supply chain financing.

The forward-thinking approach as a strategy

The collapse of numerous banks in the last month have taken many businesses by surprise; it has become clear that relying solely on short-term fixes and operational expertise is no longer sufficient.

Instead, a forward-thinking approach that considers the long-term viability of operations is vital for businesses. For Kurt Shintaffer, co-founder and CFO at US tech company Apptio, the pandemic should have primed financial leaders.

Speaking to The CFO, Shintaffer explains Apptio was better positioned for any economic disruption, including volatility within the banking sector, due to key cross-business relationships formed during the pandemic.

However, comparing the current market conditions to those during the Covid -19 pandemic, Shintaffer says the significantly higher interest rates make it harder to rationalise some investments due to the higher cost of capital.

“CFOs are taking an even more conservative posture in terms of cash management, knowing that our jobs are not to get incremental interest yield. Our job is to make sure we preserve capital and deploy it well,” he says.

“We are definitely thinking about our treasury management from a different lens today.”

The recent bout of volatility within the global banking sector has been a wake-up call for businesses to prioritise strategic leadership at the highest levels. It is no longer sufficient to rely solely on operational expertise or short-term fixes. Instead, companies must adopt a forward-thinking approach that considers the long-term viability of their operations.

The disruption has highlighted the need for strategic leadership in businesses; as Ortega states those that fail to adapt quickly could be left vulnerable, while those who prioritise a strategic approach could weather the storm.

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