With the introduction of Basel III rules, particularly the liquidity coverage ratio (LCR), many banks began threatening to shed product lines and in some cases, their clients with them. But nothing is set in stone, as many treasurers are finding out. One day lockbox services is out, the next day it’s in.
“I don’t know what to believe any more in terms of what banks are and aren’t doing,” said one treasurer at a recent NeuGroup peer group meeting. “Last year they said they were going to pull out of everything now they’re saying they want to stay in.”
Products falling into the will they or won’t they get rid of them category are notional pooling, ECR, and lockbox. But while banks have been a little bipolar when it comes to these and other products, they’ve been pretty clear about deposits. That is, they don’t really want them. The waffling is mainly due to LCR and what it portends. The LCR requires banks to have enough high-quality assets to hold out for 30 days in times of stress. It also divides deposits into operational — for payroll or AP, etc. — and non-operational deposits — the cash left over and which can be withdrawn quickly. It is these non-operational deposits that are not considered high quality.
This has left many treasurers wondering where their deposits should go. They are finding some destinations as not all banks are shying away. Wells Fargo and US Bank are reportedly accepting commercial deposits. Japanese banks are also telling US MNCs to send their unwanted cash. Smaller US regionals are said to be taking deposits, but they come with their own kind of costs, treasurers say.
“There’s no shortage of mom and pop banks looking for our deposits,” says one treasurer. “But you lose a lot of visibility.”
And for many companies it’s not so simple to pack up and leave a bank that won’t take your deposits. That’s why banks are trying to be flexible and work with clients on a case-by-case basis. This means the old quid quo pro and the comeback of loss-leader banking. Banks will keep offering those less attractive – or more costly to them – products as long as the company — even if it’s a few years down the line — uses the bank for other business. And this is where good relationship management comes in for treasurers.
“When it comes to valuing relationships, there will be a lot of things that come into play,” says one banker. “But there’s no standard approach to assessing value. What’s most important is open and honest discussion” between the bank and the client.
What is also happening is that when some products lose luster (or value), others products rise to the top. For instance, while notional pooling has been losing support from financial institutions, corporates are now looking into new liquidity arrangements like on-behalf-of structures.