The Irish government has taken a very bold initiative and underwritten the liabilities of the Irish banks. In doing so it has taken a big political risk in the general economic interest of the country. It remains to be seen how smart a move it is but there is no doubt it has achieved its short term objective in stabilising the banking system. It will be very interesting to find out the ’terms of the deal’ and at what cost it comes for the banks.

For the corporate sector the guarantee brings some welcome calm to the turbulence which the Irish banking sector was experiencing on Monday last when at least one bank was under threat. This move by the Irish government will have done the image of Ireland as a pro-business economy much good following much bad news in recent months.

Who would have thought that major global banks would go to the wall and that the global banking system would come so close to collapse? Who would have anticipated early last year that governments all over the world would have to step in and rescue the banks? The crisis in the financial markets has left Finance Directors and Corporate Treasurers with headaches that they might never have envisaged in their lifetime.

Attempts to shore up the banks are very welcome and hopefully will free up badly needed liquidity. In the meantime companies must apply lateral thinking to the issues and how they are affected. Fundamental questions might be:
- Can the bank reduce or cut off the supply of finance to the company?
- How secure are the company’s cash balances?
- Can the bank increase the interest margins on borrowings?

Companies must conduct a root and branch analysis of their banking and treasury arrangements to ensure that they do not get dragged into a crisis of their own. We have seen how the credit crunch has had such a domino effect in the financial sector. It will have a serious impact in the general commercial sector and those organisations that are not prepared may suffer catastrophic consequences. Companies will go out of business because they have inappropriate banking structures in place.

There are safeguards which can be put in place in order to minimise the risk to companies. Companies must undertake a comprehensive analysis of their banking structure and fully understand all of the issues. In doing so, they will be able to identify the main risk factors and be prepared to deal with them.

Companies must also be fully aware of the precise terms of their contracts with the banks. Specific terms which may not have appeared to have had much significance last year, could now have serious implications for the company if applied today.

Strong companies have very efficient banking arrangements. An appropriate banking structure is vital for all companies. It will minimise banking costs which will be very important in the gloomier looking economic climate. It will also safeguard companies from any risks to the financial stability of their business.

The banking industry will transform itself following the events of recent times. Banks will return to traditional and more conservative cash-flow based lending models. This will not be good news for companies in certain business sectors and they will have to alter their financial structures. Finance Directors and Corporate Treasurers will have a key role to play in the months ahead!