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Basel III: Four Ways Treasurers Can Take Action

  • By Daniel L. Blumen
  • Published: 7/15/2015
It’s clear at this point that Basel III is having, and will continue to have, a major impact on banks offering treasury services and therefore their clients as well. The question for business consumers of these services is what should be done about it. There are four steps that prudent treasury professionals can take to protect themselves from disruptive change, such as withdrawal of services or significant repricing.

1. Perform an impact assessment.

The objective in this step is to understand how your particular organization will be affected by Basel III. Validate your credit rating to know where you stand with current and prospective banking partners. Sources for this information include rating agencies and banks themselves. Make sure that you validate the assumptions used by the raters and their input data. You will not be the first to improve your rating by challenging out-of-date or inaccurate data.

Make sure you have visibility of all corporate liquidity, not just what you currently manage, and then assess transaction flows, categorizing them by entity, currency, type and bank currently performing the service. When finished, determine your real liquidity requirements stripped down from extra credit maintained for hypothetical scenarios. These are the funding needs for the short and medium term and should also be extended to the other side of the balance sheet to include deposits and investments.

2. Complete a counterparty review.

With the impact assessment in hand, turn the tables and start looking at your counterparties, including banks, other financial institutions, customers and suppliers. Identify your exposure to the various categories of counterparties and particular companies within each category. This allows you to validate that you have not exceeded deposit limits with a bank or credit limits with a customer. There is a good chance that everything will look fine at this point, but make sure to develop a way to review and update the analysis. The situation is evolving and a formal process to ensure continued accuracy and appropriateness is required.

3. Perform a RAROC analysis.

Initially developed as a profitability tool that banks use to assess their clients, risk adjusted return on capital (RAROC) includes all elements of the relationship. Most banks use some variation of RAROC analysis to make their pricing and capital allocation decisions.

Given that this is the case, why not see yourself as others see you? Perform your own RAROC analysis for your banking partners. The results of your analysis will not match that of each bank but can serve as a good basis for knowing where you stand with your banks. Ideally, you want to have similar RAROC scores for all your banks; this shows that each is getting a fair share of your spend and, if the level is too low for your preferred banks, reviewing the scores can show you where to streamline relationships.

4. Build a banking continuity plan.

As the name implies, this is similar to business continuity plans used in disaster recovery, but focuses specifically on banking operations. It allows you to act quickly if one of your key banks exits a market where it is serving you. Look at your current providers and determine who else could provide services, would you be interested in working with them and critically, would they be interested in working with you. Categorize your banking and other activities as critical, core and nice-to-have. Finally perform an if/then analysis with planned actions under various scenarios.

Basel III is going to have a significant impact on corporate banking relationships. By looking ahead and beginning to plan now, corporate treasury professionals can be proactive and manage that impact rather than just waiting to see what happens. Communication is essential to the process. The sooner you talk with your banks about the impacts of Basel III, the better off you will be.

Daniel L. Blumen, CTP, is a partner with Treasury Alliance Group LLC.

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