In today's rough economic times, many companies have opted to
either forego development of a comprehensive Disaster Recovery
Plan, or at minimum delay updating their current plan due to the
desire to conserve cash. While this is an operational conservation
effort to conserve cash for credit ratings, it can in fact actually
hurt the credit rating or line of credit for the company. Three
major changes in Federal banking enforcement can significantly
affect your business.
FDIC Enforcement of the Individual Business Bank Credit
Index
Effective Feb. 1, 2009, FDIC has announced that all banking
institutions must comply with the guidelines that require the
collective Bank Credit Index to be less than 100. Many banks have
exceeded this number and it will take a stiffening of their loan
portfolio to get back in line. The credit index is a business
credit rating for each loan or line of credit customer based on the
current financial condition. The bank index is the cumulative index
of their portfolio.
This affects you by a possible increase in your interest rate
based on your risk. The two risks you face are:
- A significant increase in your rating by your inability to show
a plan to continue to generate revenue to pay your loan even if you
did have a disaster. If a comprehensive plan is in place, the bank
is not required to penalize your rate.
- If a plan is in place that shows how you would generate
revenue, the bank can calculate your rating differently and you are
not penalized by the group that does not have a plan in place
(unless of course you are one of the group that does not have a
plan.)
The Bank's Commercial Credit Index
In order for the bank to comply, they have three alternatives to
improve their own index.
- First, they can increase the interest rate on loans or lines of
credit. This could affect you by driving your cost of money up
significantly. For example, an increase of only 1% on a $50 million
loan or line of credit would cost you $500,000 annually. Compare
this to a plan that cost you even $100,000 to create.
- Second, the bank can deny any more funding. If you feel that
you will need (or might need!) additional funding or line use,
denial could seriously limit or even destroy your business
potential in this economy. Businesses that maintains a current DR
Plan is more likely to receive additional funding since the Bank
can justify to FDIC auditors that a plan is in place to continue to
generate revenue and make the necessary bank payments.
- Lastly, because some banks have indexes that are so far out of
balance they may be required to call the note to reduce the risk
and index. Having a DR Plan in place to generate revenue would
reduce the likelihood that you would be called.
LIBER (London InterBank Exchange Rate)
Effective April 1, 2009, banks are required to use the LIBOR
numbers to establish loan rates for each of the credit risk
categories the commercial clients fall under. LIBOR is the rate
that banks charge other banks for money and is defined daily. This
means that interest rates can rise immediately on any given day
rather than the quarterly rate changes governed by the Prime
Interest Rate, which is a uniquely United States number. Clients
can no longer time the access to funds available based on
projections (or reductions) of the prime rate.
We all think about a tornado, fire, or other natural disaster
when we consider Disaster Recovery Planning. However we need to
realize that business in America is facing an economic storm right
now that can have just as much impact on our businesses as a
natural disaster would. To prepare, as well as weather this storm,
we need to be sure that we have plans in place. Remember that in
either case, Natural or Financial, the true test of Disaster
Recovery Planning is the plan to be able to continue to generate
revenue until things can return to business as usual.
StoneHenge Partners has a proven methodology and experienced
consultants ready to prepare or update your DRP. For more
information about our BCP services, contact us.