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How Basel III Could Impact Your Treasury Department

  • By Daniel L. Blumen, CTP
  • Published: 7/10/2015

Basel III guidelines have incented banks to scrutinize the balance between transaction services and credit products for their clients. Each bank has a unique deposit mix and capital structure and will choose to address its liquidity ratio requirements differently in terms of services and credit. But there are some general points that are common to all:

  • Large deposits that were welcome in an earlier time may not be welcome in the new environment, especially if they cannot be deemed operating cash.
  • Services that were standard in a pre-Basel III environment may not be available to all companies post-Basel III implementation.
  • Transaction costs are likely to increase, reflecting the need to improve return on capital.
  • Credit availability may decrease and the associated costs and spreads will be higher.
  • Banks will be sensitive to the nature and tenor of their depository business.
  • Third-party payment providers may face new pricing that makes them less competitive with conventional providers.
  • Third-party providers of credit and trade services may increase their participation in niches currently occupied by banks.

Companies that are in a strong cash-positive position with a conventional mix of cash management service requirements should be in fairly good shape, as banks will value operational balances with deposits tied to transactional business. Custody and clearing services and most core cash management products will become even more desirable to banks, but non-operational cash balances will be of less value. The challenges faced by companies with excess cash will be optimizing the operating business allocation and finding suitable liquidity and deposit placement options among their multiple banking partners. Bank alternatives may surface in order to receive a better return—especially on non-operating funds held less than 30 days. One possible outcome—banks may create new investment products such as rolling 31-day CDs or call accounts.

For companies that are highly leveraged and in a net borrowing position, services and credit options may be more limited with steeper costs and restrictions on line usage. Also, a higher risk rating will probably have more of an impact on the cost of credit. For all companies—cash rich or net borrowers—credit facilities that are in place for liquidity management flexibility to fund potentially large capital expenditures or acquisitions will be expensive. Assuming general creditworthiness, banks are likely to extend the credit requested, but underutilized lines will no longer be an inexpensive safety net as Basel III specifies that these lines must be considered in the liquidity ratios.

Basel III may also spell the end of notional pooling, a familiar tool in the liquidity management toolbox. Notional pooling has always been a challenge because it is unpopular with some regulators, raises tax concerns with others and is often opaque from a cost standpoint to potential users. These challenges are sometimes offset by notional pooling’s conceptual simplicity and other benefits.

The potential need to actually move funds periodically to validate the ability to offset negative balances, combined with the probability that regulators may require banks to calculate their new ratios using gross rather than net account balances, will further complicate notional pooling. The end result is that notional pooling will almost certainly become more expensive and that some banks may stop offering it to all but their very best clients, giving preference to those with high balances and little or no history of overdrafts.

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


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