8 August 2016 - Overview on the European Banking Authority Stress Tests

European Banking Authority (EBA) Stress Tests – with rising bank capital requirements, now is the time for banking and Surety collaboration

UK leading Surety specialist DRS Bond Management says that higher bank capital requirements may mean banks will move further away from providing bank guarantees for Performance Bonds and Letters Of Credit (LOC). The Surety and banking sectors therefore have an opportunity to collaborate for the benefit of British business and each other.

51 banks across Europe were put under the microscope recently to see what would happen to them if the global economy and financial markets came under strain. Although the EBA said the banking sector was stronger than at the time of the 2008 crisis, further capital strengthening was advised.

This creates greater impetus for the banks to exit risk-weighted assets such as Bonds and Letters of Credit. Meeting bonding requirements or underpinning Letters Of Credit with bank guarantees has one major drawback for business – cash requirements. Banks typically require 100% collateral as a guarantee, and costs can be high.

By switching to a tailored Surety solution, companies can emancipate cash back into the business, thereby freeing the bank facility to benefit other areas of the business.

Surety products are provided by leading insurers and are investment grade (minimum “A-” rating from Standard & Poor’s) rated. A Surety guarantees to customers that a business will fulfil its contractual obligations to them. With a Surety facility, a business can plan and apply for work knowing it can meet clients’ requirements without the burden of locking away vast quantities of cash that should be working hard within the business, as collateral requirements are considerably below those required for bank guarantees.

Fiona Recker, Joint Managing Director, DRS Bond Management, said:
“With capital requirements rising now is the time for Surety and banking to work together in the interests of British business. We are already seeing initiatives between the banks and alternative lenders in connecting small business loan requests to the right provider. In a similar fashion we could see banks referring businesses to the Surety market to meet their bonding and LOC requirements.”

Chris Davies, Joint Managing Director, DRS Bond Management, said:
“A Surety solution benefits the bank and it emancipates cash back into company bank accounts from being deep frozen in guarantees. Furthermore, it benefits the economy by helping sectors, such as construction, be fighting fit to meet the challenges and opportunities in a post-Brexit Britain.”

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