Hund: I think companies that do this well have certain characteristics. They dedicate resources to risk management. You will hav e a staff that looks at all types of risk — volatility in price, supplier or counterpart risk — the people who do it very well have dedicated resources toward it.
They have board awareness and accountability at the board level for policies around risk management.
They usually have a written risk management policy. It will have leeway in it so if they are involved in trading or using futures market there is room for same time decision making but there are policies and guidelines that are monitored and enforced at the board level.
You’re seeing a lot more scrutiny regarding counterparty risk. Who’s buying this product, what are their resources and how are they paying me? and who are my suppliers? Since we’re talking banks, whether it’s your bank or the person taking your trade — MF Global is a perfect example of this. There was counterparty risk at MF Global. People assumed that their deposit accounts were covered and if it was handled properly those accounts should have been segregated. It didn’t work out that way, and people were hurt. It was a wake-up call for knowing your counterparty.
From a banking standpoint, do I have more than one bank? Is my bank knowledgeable about my industry? Is it sound? Is it domestic or foreign? What if I’m doing fine but my bank is under stress and can’t provide me with the credit facilities that I need? What do I do then?
To me, risk management is very broad. Companies that manage this well manage all aspects of it. It demonstrates discipline about looking at this industry in the long view, and knowing there will be downturns and run ups in the market, but being disciplined about it so your balance sheet can be relatively stable.
F&G: For the banks a company has an existing relationship with, how do you vet or review that its still a good fit for your business?
Hund: I think the client has the right to know, and I think it is appropriate to ask to see their balance sheet. Ask how they did on the stress test — because banks are now being asked by go through these exercises with the OCC regarding the strength of their balance sheet. I think it is perfectly appropriate to ask what their public ratings are, if they are a publicly rated bank. What are your lending policies? What percentage of your portfolio is made up of my industry? If you’re the only grain client a bank has, how well will they be able to understand and address market changes? It’s OK for customers to ask for banks to demonstrate their strength. As a banker, I would encourage customers to do that.