Borrower Onboarding and Client Attractiveness 

Vikas Nigam, Director, Head of Agency Lending in the Americas, Deutsche Bank

This article is part of the 2023 Beneficial Owners Guide, which can be accessed here.  

How do you approach borrower onboarding and what factors do you consider when evaluating the attractiveness of potential clients as borrowers?  

As a program, we are selective of our counterparty base. Adding a new counterparty should add value to the program; whether by adding competition for supply, providing balance-sheet or offering collateral for cash reinvestment trades. Additionally, we also consider regulatory netting as a key factor and crucially, as a program, we should be able to justify the name should a client ask why they should be approved. 

How do you assess creditworthiness, risk profile, and suitability of prospective borrowers, and manage associated risks during onboarding?  

With Deutsche Bank’s compelling dual indemnification, the bank has a vested interest in ensuring the safety and soundness of any counterparties added to the program. As such, our credit and risk teams are the first port of call for any new approvals. The bank employs a cadre of credit/research analysts, whose primary role is following the financial sector. These analysts create a feedback loop into our bank-wide risk systems which monitor exposure to individual entities and the broader sector, across the bank. 

Depending upon the capital of the institution being added, we will be given a credit line, which is monitored daily, against the securities we lend and take back as collateral. As credit lines are utilised, we can either request a higher limit, alter the composition of transactions to reduce the volatility in the basket of securities, or we can increase margins, so as to reduce the impact of the value at risk (VAR) volatility on the credit line.

How do you attract and retain high-quality borrowers in a competitive market, and differentiate your offerings to make your organisation appealing to potential clients?  

Recognising that borrowers have a choice of where to do business is just as crucial as recognising our clients have a choice of lending agents. Just as we spend a significant amount of time and resources to get to know and understand our clients, we spend just as much time learning about our counterparties, their business needs and understanding their funding and capital requirements in light of regulatory metrics such as NSFR, LCR, and RWA.

Being able to talk about them and promote trades/clients beneficial for all parties, is a fast-track way of staying relevant and becoming a preferred partner.

How do you identify and manage risks associated with potential clients with challenging credit or risk profiles while balancing business objectives?  

Being a third-party lending agent, we have the ability to be just as selective of our client base as we are with our borrower base. Having more supply is usually a good thing but not all supply is created equally. Assets could be widely held blue chip names. Guidelines could be restrictive. The client could even be from a non-nettable jurisdiction. Being familiar with the way counterparties work, allows us to be able to work in concert with our client on some of these challenges and the necessary steps needed to overcome them. Whether the client is willing to make the necessary changes to their program and, thus, their attractiveness is then down to their comfort level. 

REINVESTMENT RISK IN TIMES OF STRESS  

How would you define reinvestment risk, and how does it come into play during times of financial stress in the market?  

Though we all have a general understanding of what reinvestment risk means, it is, in fact, made up of several forms of specific risk with the main ones being: counterparty, interest rate, liquidity, operational and roll-over risk. Understanding each of these risks allows one to better understand how various market changes will impact their program and how best to mitigate those risks. During times of market stress, clients are mostly concerned about counterparty risk and we find clients take comfort from agent indemnification. This generally means that clients prefer to be in indemnified repo reinvestment strategies than unsecured instruments such as commercial paper etc. 

Can you provide recent examples of situations in which reinvestment risk may be heightened during times of economic uncertainty or market volatility?  

Last month’s focus on the banking sector is a great example. For most securities lending programs, cash is invested in a mixture of outright investments, money funds and reverse repurchase agreements. Outside of buying treasuries, most investments include some form of exposure to the banking sector. Understanding the nature of these investments (unsecured versus collateralised; direct versus indirect), will help one understand their true exposure. For instance, having $10m invested in CP issued by one of the regional banks would have a very different risk profile to that same $10m CP being received as collateral in a triparty reverse repo transaction, with one of the European banks. 

What strategies or techniques would you recommend to mitigate reinvestment risk in a portfolio during times of stress or market turbulence?  

Understanding the different risks allows one to adapt guidelines to address and mitigate those risks.

• Worried about counterparty risk? Diversify away from direct investments, opting for collateralised investments instead.
• In a period of high inflation? Choose investments with frequent resets, so that the investment does not suffer from a below market interest rate.

Utilising these mitigants as part of a core portfolio composition strategy, should help absorb a lot of the “noise” that portfolios can experience during times of market turbulence. For ultimate protection, try and work with partners that are willing to have skin in the game and share/cover loses, to ensure interests are all aligned.