Changes required under the capital requirements directive IV (CRD IV) to bank capital are hitting banks' capacity to conduct notional pooling, but not all jurisdictions are being impacted in the same way.
Amit Agarwal, head of liquidity management services, EMEA, TTS at Citi, says the changes are affecting how funds held within the pools are seen, adding: “One of the rule changes under CRD IV is that banks should report the cash position within the pool on a gross basis.”
The new rules mean all balances in the pool are treated separately.
Agarwal says: “If a bank has two accounts in the pool, one with a positive sum and the other with a negative, the regulation requires the banks need to report balances on a gross basis.”
Benoit Desserre, global head of global transaction banking and deputy head of global transaction and payment services at Société Générale (SG), says this inability to incorporate netting has serious consequences for how banks categorize these balances.
“Now banks are required to report all debit positions, with no offset possible with other positions, with all liabilities to be reported on the balance sheet," he says.
"The consequence of this is right away the notional pools have become part of the leverage ratio as well. And because there is exposure to report, there are risk-weighted assets linked to it, and this has to be reported as such.”
All of this means the product is becoming more expensive. Some banks are even concluding they cannot continue to offer it, at least not to all clients. The decision about which clients to provide the service for is now under great scrutiny.
Jennifer Doherty, HSBC
Jennifer Doherty, global head of commercialization, liquidity and investment products, global liquidity and cash management, HSBC, says: “Due to the increased capital costs associated with the product, there is increased due diligence and care in positioning the product with clients overall.”
SG's Desserre says the banks that do decide to carry on offering the product will need to go into it with their eyes open.
“The banks running notional pooling will want to be completely sure what they can make out of it," he says. "For some this will mean pooling will be stopped. For others it will be repricing, but maintaining the product to keep the customer relationship. The main recommendation is the bank stands by the product it sold in the first place. There have been some big changes from some banks recently.”
Further impacting the marketplace is the realization that US banks are not yet required to fully comply. Even before the rules are fully implemented in 2018, this split is being noticed. Corporates using notional pooling are asking if their banks will still be offering the service.
“Under the US version of the rules, banks can report pool balances on a net basis thereby creating a potential disadvantage for European banks,” says Citi's Agarwal. “We have seen some of the European competition pull back from their client base around notional pooling. There are proposals in the US, too, on whether banks should also report their balance sheet on a gross basis, but this needs to be planned out and finalized.”
Unless the rule are updated for the US institutions, there is the possibility they will have a competitive advantage over their European rivals in offering notional pooling services. Depending on how the bank operates, it is possible for them to still provide the same pooling services from outside of the regulated jurisdiction.
Amit Agarwal, Citi
Agarwal adds: “Regarding the US banks, it is down to how they are structured. It is not a case of it being the US banks versus the European banks over the regulation. If an American bank offers pooling through a European subsidiary, they are subject to the same rules as a European bank. We are offering our service through the London branch of our US bank.”
However, the likelihood is that the rules will change to become closer aligned, even if they do not match exactly.
HSBC’s Doherty says: “US banks which report under US Basel are for the moment not subject to these gross reporting requirements and resultant capital costs. However, given the recent Basel Committee on Banking Supervision consultative paper and deliberations, there is a feeling this could change.
"The final ruling on the US proposed changes to potentially align to the EU CRD IV is not out as yet, but is anticipated to be out in the first quarter of 2017.”
Even within Europe, the ability to provide notional pooling does not fall neatly into one bracket. The economic differences that divide the continent make it prohibitively expensive for some banks.
Desserre says: “Across Europe there are other differences. Generally speaking, banks from the northern and central European countries have plenty of cash and are considering charging euro deposits for negative interest, while banks in other countries are still looking for more euro and even remunerating them. On the very same currency the appetite is different.”
While the change is most impacting those banks that have offered notional pooling for some time, others are likely thankful they previously chose to focus on different products.
Desserre says the strategy taken by SG has now turned out to be a strength.
“Because in the past we favoured mainly our offer in physical pooling over our notional pooling, it means we are now a step ahead with the product for the customers now enquiring about it," he says. "We have, indeed, not faced a dramatic change in our balance sheet and what had been a possible disadvantage in the past is an advantage today.”