Liquidity rule forces corporate deposit rethink
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Liquidity rule forces corporate deposit rethink

Basel III’s liquidity coverage ratio (LCR) – the first binding attempt to micro-manage lenders’ liquidity buffers – has fundamentally altered the status of corporate deposits, triggering treasurers to transform their liquidity-management strategies.

For corporate treasurers, the LCR divides deposits into two: operational cash, ie working capital; and non-operational cash, ie excess deposits.

Bob Stark-160x186

 Given the potential rise in borrowing costs, the value of internal cash becomes even greater

Bob Stark,

Banks need to hold up to 25% of the value of the operational deposit of a given corporate in high-quality liquid assets to withstand a 30-day stress environment. Non-operational cash, by contrast, receives more-punitive punishment, as the liquidity requirement can be as much as 100%, making it expensive for some banks to hold corporate deposits, and the cost of which could be passed back to the corporate.

Bob Stark, vice-president of strategy at Kyriba, explains that for some banks a lot of their deposits would be in the form of non-operational cash, which would involve high costs to meet the LCR provisions. In some cases, the liquidity costs might be outweighing the financial benefits of holding the funds. 

Stark speculates that the drop in returns was a catalyst for RBS’s decision to leave international transaction banking. He says: “LCR is beginning to have a large impact – and will certainly continue to do so as more banks achieve full compliance.

“Banks are able to analyze the cost of attracting operational and non-operational deposits, which will drive the rates they offer, if they even want some of those deposits at all. Similar impacts will be felt on the lending side – especially as the full cost of lending to corporates is priced in.”

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Stephen Baseby, ACT

Stephen Baseby, associate policy and technical director, Association of Corporate Treasurers (ACT), adds: “What is more likely to impact banking services is ring-fencing.”

Ring-fencing has been pushing banks back to their domestic markets. And where overseas regulation has been having an impact, it is making it easier for the banks to make the decision to move back home. 

Cash pooling is already seeing a negative impact, as some banks are deciding they no longer want to provide the service as part of their transaction-banking offering. Corporates are left looking for another provider, or searching for another way of running their operations.

As the retail and investment-banking units of a given lender is to be separated according to UK and EU legislation, a decision will have to be made about where the transaction-banking unit will fall. This leaves companies in the tricky position of not knowing which part of a bank they will be dealing with. 

ACT's Baseby says: “Corporates will have more difficulty in identifying their counterparty as ring-fencing occurs.” 

In turn, there is more of a stringent selection process in picking a counterparty. Baseby also sees the decision on pricing and how that will affect cash pooling and other tools as being one of the final outcomes of the Basel III and the ring-fencing rules. Corporates can only wait and see how it will turn out.

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Financial regulation: special focus

Ahead of this, Kyriba's Stark suggests corporates investigate how the cash they hold in the bank is defined, to give an indication of how valuable they are to their bank.

He says: “Many banks will value 30-plus day deposit commitments, making longer-term investments potentially more valuable. Forecasting also allows treasurers to seek out other investment options that may offer even more yield.”

Stark recommends corporates understand the value of the cash that is held internally and look for ways to make the most of it.  

“Large number of treasurers are spending more time assessing working capital programmes to identify how to maximize internal cash," he says. "Given the potential rise in borrowing costs, the value of internal cash becomes even greater.”

Corporates looking to make the most of these funds should consider alternative investments, including money market funds or repos. 

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