Longstanding guidance to “know your borrower” is respected for good reason. The recent and unexpected upheaval in the banking and lending sector is triggering a renewed focus on financial risk management relating to borrowers and potential borrowers.

Banks and lenders need a clear understanding of the treasury-management function and risk-mitigation strategies employed by their borrowers and potential borrowers. As in previous challenging economic environments, the current uncertainty is an unpleasant, but beneficial, reminder to evaluate – or re-evaluate – these important functions and strategies. The Treasury Management Gap Analysis is an essential way to achieve this goal.

The Treasury Management Gap Analysis has long been recognized as a proven way to ensure thorough due diligence and that treasury management controls are appropriate as well as focused on mitigating risk. This analysis examines the company’s balance sheet, interest rate and liquidity risk management as well as many vital aspects of its risk profile, procedures and activities. It sets the stage for reducing exposure risk, bolstering money management practices and improving operational process efficiencies.

An effective analysis explores the following, among other, key issues:

System Performance– Naturally, identifying opportunities for improving a treasury management system’s performance begins with a thorough review of the system itself. The company or its advisors should probe planning, policies and procedures and query those leading these functions. The resulting assessment serves as the basis for amelioration.

Cash Balance Risk – The analysis also reveals credit risk concentrations that result when borrowers maintain cash deposits at a single financial entity or at two or more located in the same geographical region.

Technology– It’s essential to understand the technology borrowers use to monitor their treasury activities and the controls that safeguard equipment, software, networks and employees themselves from cyber threats.

Controls Documentation – Regularly updating policy and procedural documentation is critical. This helps ensure that controls are accurate, up-to-date and properly disseminated throughout the organization. It also supports ongoing employee training and operational continuity.

The importance and specialized nature of this vital undertaking may suggest the need to recommend a qualified, experienced, non-biased advisor, a professional who can leverage experience with disruptive market dynamics, interest rate volatility, recessions, restructuring and reorganizations and who is fully equipped to weigh different scenarios and multi-layered considerations and can introduce best practices to mitigate risk and optimize opportunities for future success.

As uncertainty lingers, today’s lending institutions may well be at the mercy of unpredictability – unless they take action. Securing the services of a trusted advisor is an intelligent, proactive and protective move.

Stuart H. Kessler
CEO, PKF Clear Thinking
908-872-0940
skessler@pkfct.com

Michael Hayes, Partner
PKF O’Connor Davies
914-421-5650
mhayes@pkfod.com