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Taking Action: Steps to Basel III Readiness

  • By Andrew Deichler
  • Published: 5/18/2015

While Basel III is aimed at banks, it will have a much more significant impact on companies than its predecessors. Therefore, corporate treasurers would be wise to begin preparing now.

Speaking at the EuroFinance Cash & Treasury Management Conference in Miami, Daniel L. Blumen, CTP, partner with Treasury Alliance Group, U.S., noted that while Basel I and II did not have much of an impact on corporate treasury, the latest installment from the Basel Committee on Banking Supervision (BCBS) is another story.

“Basel III is going to be different, not only because there is more capital required, but also because it slides into other areas—the liability side of the bank’s balance sheet and bank leverage,” Blumen explained. “This is really going to hit the depository services and treasury products that you deal with in every country in which you operate. So it really does matter to treasurers. Global treasuries will feel the impact even more because of the global systemically important bank (GSIB) designation.”

Taking action

There are steps treasurers can take now to prepare for Basel III:

  • Impact assessment: Treasurers should evaluate their organization’s current state and what could happen to it once Basel III kicks in. What banking footprint do you have? What services do you require? “Validate your credit rating. Use the rating agencies, look at the banks – make sure that you correctly validate their assumptions and input because a lot of times, people may not have the correct rating,” Blumen said. “Ensure that you have visibility of all corporate liquidity. If [Sarbanes-Oxley (SOX)] and [the Foreign Account Tax Compliance Act (FATCA)] didn’t scare you into it, Basel III really ought to. In this day and age, you’ve got to have visibility over all your corporate liquidity.”
  • Counterparty review: Identify your exposure to all of your banks, as well as customers and suppliers. Who are you engaging with? What is their situation? Make sure you enforce compliance with your policies.  
  • Risk-adjusted return on capital (RAROC) analysis: RAROC is a profitability tool banks developed about 20 years ago to determine what their corporate customers are really worth to them. RAROC takes all elements of the relationship and assigns risk ratings to each one and compares total risk to total return. Corporate treasurers need to do this for themselves. “It’s a way of identifying whether you’re giving your good or bad business to the wrong people,” Blumen said.  
  • Banking continuity plan: Much like the disaster recovery plans most corporates have in place, they should have banking continuity plans. Blumen noted that a major UK bank is currently withdrawing from certain types treasury management business, which has impacted treasury departments. When those types of incidents occur, a treasury with a banking continuity plan can quickly determine what bank will fill that slot. “You should have a plan, because it’s our belief that in the next 18 months you’re going to have the opportunity to deploy it,” he said.

As regulators adopt their own versions of Basel III, the resulting changes to banks’ balance sheets, will have a substantial impact on corporates. The problem is, right now, not even the banks know what that impact will be.

Probable scenarios

Even with this uncertainty, Treasury Alliance Group has put together a number of likely outcomes that will affect treasurers. First, the higher equity requirements are going to translate to a higher cost of credit products. Next, the liquidity requirements will result in new pricing for depository services. Lastly, the leverage requirements are going to translate to new pricing of other services.

The effects on deposits will be particularly significant. Corporates that are only using certain banks as temporary repositories of funds and plan to eventually send their money elsewhere are not going to be very popular with banks, Blumen explained. There is also a question of whether there will be a reduction in the number of liquidity management products that banks offer.

On the borrowing side, costs are going to go up. “Overdraft finance is going to become more expensive. So, hypothetically, if your local affiliates are telling you, ‘We don’t need to have a large liquidity structure, because if things really get bad, we’ll just tap our overdraft for a couple of days,’ that’s not going to be as viable because that overdraft capacity you’re maintaining is going to cost more,” Blumen noted.

Additionally, new credit facilities are going to cost a lot more. Therefore, treasurers will need to be more attentive to their borrowing needs.

Bank relationships will also take a dramatic turn as a result of Basel III. Blumen noted that one bank hired 5,000 compliance professionals about a year ago. Those compliance people don’t work for free, and those compliance costs are significant. A bank may eventually decide that it is more efficient to eliminate its small relationships and only focus on large ones. “If you have a treasury management structure that uses a lot of little banks, they’re all going to have to go through the full [Know Your Customer (KYC)] on you, and they may just decide it’s not worth it to have this single, double, triple account relationship with you in just this one place,” Blumen explained.

The good news is that treasury management business will become even more appreciated at most banks. “Good, really stable treasury management business is going to be quantified desirable,” Blumen said.


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