Banks turn up heat on clients over short deposits
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Banks turn up heat on clients over short deposits

With new regulations set to increase the burden on banks holding short-term cash, many financial institutions are telling clients they need to leave their money on account for longer while weighing alternative cash management solutions.

Clients must plan cash flows carefully and opt for longer-dated balances, say bankers, because the cost to financial institutions of holding deposits for less than 30 days has become punitive, even after last month’s move by the Basel Committee to dilute the global liquidity ratio. “Under Basel III, banks are rewarded for having longer-term or stable liquidity,” says Lisa Rossi, global head of liquidity management at Deutsche Bank in New York. “As a result, shorter-term cash balances, broadly speaking, are not considered of equal value by some banks.”

In the US, unlimited Federal Deposit Insurance Corporation protection for balances in non-interest bearing transaction accounts rolled off at the end of last year. Those deposits are now aggregated with any interest-bearing deposits and the combined total is insured up to a $250,000 limit. For larger companies in particular, the new system adds an element of risk to what was previously a risk-free option.

Meanwhile, under the Basel III framework, banks will be required to maintain liquidity buffers of high-quality assets against a portion of any deposit that does not have a term of greater than 30 days.

“In the current environment, corporates that are holding a lot of cash are not going to find many opportunities for significant returns,” says Rossi.

That sentiment comes at a time when corporates are awash with cash. In a survey by SunGard in November, 42% of respondents listed capital preservation with immediate access to all cash as their primary cash investment strategy. Meanwhile, 37% of corporations surveyed had increased their cash balances during the past few months.

The US Federal Reserve reports US corporate cash as of September 30, 2012, was $1.73 trillion, a 2.5% increase from the previous quarter.


“It makes sense for companies to keep more cash on the balance sheet so that they can be flexible to react to any economic downturn, and at the same time they have been doing quite well and are generating a lot of cash,” says Michael Mueller, head of international cash origination at Barclays in London.

“The challenge for banks is that a part of the liquidity needs to be kept as a liquidity buffer, which means it’s difficult for them to generate a good return.”

In response to the pressures on short-terms deposits, several banks have moved to offset the rules, for example by providing deposit facilities that have rolling 30-day maturities, enabling them to meet their regulatory requirements. Another solution is to look to use the rules to their advantage, and there is an exemption to the capital requirement for cash which is defined as operational.

“What we would like to ensure is that the liquidity of the deposit product we are selling is part of a wider relationship of current accounts and ongoing cash flows, because to the extent that the cash is truly seen as operational, the bank has a greater ability to use if for financing of the asset book,” says Mueller.

“If you have a solid banking relationship with your client, then you will have a much better understanding of their cash flows and that can be the basis for looking at corporate liquidity requirements in a slightly different way.”

Barclays is working on cash management solutions that reflect those priorities, while Deutsche has introduced what are known as flexible ever-green deposits, with 60-day call periods.

Meanwhile, corporate treasurers are looking to turn away from banks, and one of the most common alternatives is money market funds. Those companies using money market funds hold an average of 50% of their cash in these funds, representing an increase of more than 11% from 2011, according to SunGard in November.

However, in this area there is also potential for new regulation in the coming period, including capital requirements, holdback provisions and mark-to-market accounting requirements.

As treasuries consider their options, one alternative is non-traditional repos, in which cash is deposited with banks in return for collateral, which the bank must deposit for the benefit of the company. The solution is likely to work best for companies with large amounts of cash to deposit, but the repo option is unlikely to go down well with banks.

“I am not sure that banks currently feel they need to support their deposit base by offering collateral for additional deposits,” says Deutsche’s Rossi. “You have to remember that we are now at the point where corporates have healthy cash balances and banks view deposits more favourably if they can be used to support regulatory capital requirements. This is particularly the case under Basel III.”

Even in an era of large corporate cash piles and hopes that the cash management business would prove a mercifully stable income stream, banks still need to innovate to generate returns thanks to new regulations.

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