February 1999 Issue



By Edward A. Celano

Before the current acquisition and merger frenzy, many middle-market companies were content to do all their banking with one bank. They were comfortable and had relationships with someone who understood their business. But ongoing consolidation in the banking industry has transformed many of those relationships into relatively fragile, transaction-driven arrangements. Such relationships can be adversely affected by a number of factors outside of the customer's control, including frequent changes in personnel, changes in lending policies and risk tolerance, public market pressures, and cost cutting. As a result, many mid-size companies, even after a 20-year relationship with their bank, suddenly discover that their business no longer fits the bank's portfolio. This often happens even when the company's fundamental business and financial profile haven't changed. A two-bank arrangement is a common way to prepare for this eventuality and make certain that, even if one bank changes unexpectedly, a second bank will continue to provide financing and offer both tangible and intangible advantages over a single banking arrangement.

Utilizing two banks also avoids the problem of outgrowing one bank whose lending limits can no longer meet your needs. That's why companies should not only consider legal lending limits but, more importantly, lower ceilings. These include internally declared house lending limits and less formally declared comfort levels as they may apply to a particular business owner. Maintaining relationships with more than one bank addresses this issue in two respects. It creates a resource that can lend more dollars to the company, and it facilitates a smoother transition in case one bank decides to either reduce its exposure or cease providing credit entirely.

Cost Advantages

Maintaining multiple banking relationships can yield substantial cost advantages as well, since competition encourages better pricing and focuses the banks' attention on customer service. When two or more banks finance and service the same company, the competitive situation forces bank managers to price their credit and noncredit products more attractively. The competition also encourages the banks to distinguish themselves by offering more products and services. While companies generally view multiple banking relationships primarily as financing tools, they should also look for banks with competitive advantages in noncredit areas. Areas such as trade finance, cash management, fiduciary services, private banking, interest rate risk management, and investing and advisory services vary in quality and sophistication at different banks.

A less tangible, but no less important, benefit of having more than one bank is the exposure to different perspectives on important business issues. Bankers often provide financial consultation, industry insight, economic analysis, and other market intelligence. The reality is that the senior management of banks--chairmen, presidents, and sector heads--are more likely to focus their attention on customers with multiple bank relationships. As a result, such customers are more likely to have access to senior management, not just the usual line officers.

Diversified financing also offers companies greater access to a wide array of professionals active and knowledgeable in their markets. Banks frequently refer accountants, attorneys, investment bankers, and other market professionals to their customers. They also have strong relationships with a wide range of professionals that have distinctive service capabilities.

Multibanking Simplifies

Managing several banking relationships rather than just one should not, normally, be especially burdensome. It usually requires more time and attention but, structured properly, the need for additional oversight can be minimal. It is now more common for middle-market companies to select lead banks for each of several product requirements. For example, a given bank may be selected to agent the credit facility, assuming the operational responsibility for the group of banks that are providing financing collectively. That way, the company only has to go to the agent bank when seeking funds. Other aspects of multibanking can also be simplified by designating one bank to handle cash collections, trade finance, and serve as disbursing agent.


When evaluating the prospect of creating a relationship with several banking institutions, a few other issues should be considered. First, the banking needs of the business should be sizable enough to attract the commitment of more than one bank--and not just yield only marginally profitable accounts at two banks. Second, in multiple bank relationships, lead banks typically charge agency fees in addition to normal facility and commitment fees. However, in agented facilities, this incremental cost is usually nominal and appropriate, given the work performed by the agent. This includes legal documentation, bank group reporting, and collateral monitoring. *

Edward A. Celano is executive vice president and head of corporate lending at Atlantic Bank of New York.

James L. Craig, Jr., CPA
The CPA Journal

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