When the Bank Suddenly Cuts the Overdraft Line
In recent months, Apenberg & Partner has observed a growing trend: More and more corporate clients are having their overdraft lines terminated by their banks. This move has far-reaching consequences for many companies, particularly in economically challenging times.
Background of the Development
Banks are legally required to hedge both balance sheet and market risks proportionally through equity capital. These regulatory requirements are designed to ensure the stability of the banking sector. Since market risks are beyond the bank’s control, there are only a few options available to a bank if it wants to reduce its equity capital requirements. These primarily include:
- A reduction in total outstanding receivables.
- A change in the composition of its receivables, shifting toward a portfolio with reduced default risk.
As a result, particularly overdraft credits, which serve many businesses as a flexible liquidity reserve, are under scrutiny – and their cancellation notice periods traditionally only span a few weeks.
It Affects the Struggling Companies
Banks tend to classify companies that are in a financially strained position as particularly high-risk. The default risk of their loans is perceived as high. For such companies, the termination of their overdraft lines can have severe consequences. Apenberg & Partner is increasingly hearing from businesses that unexpectedly face liquidity difficulties because their long-time trusted bank has suddenly cancelled their overdraft engagement.
Regular, Professional Communication is Essential
Close communication with the house bank has always been advisable. However, its importance has increased significantly in recent times. This includes a solid business and financial plan, as well as appropriate reporting. On one hand, this provides the bank with a reliable insight into the company’s banking engagement. On the other hand, regular communication is the best way to minimize the risk of an unexpected termination.