Corporates have been feeling the pinch of new regulatory requirements for some time now. Along with the eventual demise of money market funds for corporate use, companies have already seen the effects of Basel III’s leverage and liquidity-coverage ratios, both of which have prompted banks to rethink their capital deployment. At a recent meeting of The NeuGroup’s Treasurers’ Group of Thirty (T30), one banker described the challenges all banks now face and how they’re impacting their products and services.
One are companies are seeing a degradation of services is in deposits, as banks are bifurcating them into good deposits and bad deposits. Prior to the financial crisis, banks supported and profited from technology-intensive transaction banking services by reinvesting corporates’ excess cash balances. Now, however, banks may not want those deposits, at least in size, because regulators have pushed banks to hold only the sticky, long-term operating cash (the good) and reject or jettison the rest: the type that can quickly fly away, leaving banks short liquidity and too long on leverage (the bad).
Thirty-plus days and longer is now the sweet spot to be categorized as long-term, although banks would prefer 60 days or more.
But banks are getting creative. A 30-days or more term deposit is the simplest, most straightforward solution, but the new requirements have prompted bankers’ creative juices to flow, so treasury executives should expect a wave of pitches for alternative short-term investment products. A perpetual evergreen facility that remains compliant until it is called may be one; pools with contributions from multiple client accounts that continually roll through a series of maturities may be another. Yet another, tri-party repurchase agreements (repos), which are likely to increase in popularity because they’re fully collateralized and thus not subject to the new requirements, will allow corporates to choose their counterparties and the investment term.
As banks push for longer-term investments, liquidity for intraday payments may suffer. How will corporates make payroll or fund acquisitions if insufficient cash is available? One solution may be for banks to charge for providing intraday liquidity. Such a market appears to be unfolding but requires a level of reporting yet to be achieved by most banks. T30 participants said European banks have moved down this path further, but talk about it is bubbling in the US as well.
Despite some banks’ promise to stay in the corporate game, there are others that are retreating. Recent news of HSBC exiting markets like Brazil and Turkey in the wake of RBS’s pullback from foreign markets has raised concerns that other major banks will similarly lessen their global footprints as Basel III unfolds. Such a move is not something banks willingly advertise in advance, so treasury executives must keep their eyes peeled and their ears attuned to any signals that a pullback is coming. For instance transaction banking requires significant investment in technology infrastructure, so a hiatus on upgrades may be an indication of things to come. Most major banks provide correspondent clearing services, and they should now be upgrading to comply with new regulations.
One bank product that could fade away is notional pooling. Some major banks no longer provide corporates with notional pooling, in part because jurisdictions often look at the service differently from a tax perspective, and because Basel III has increased the cost of committing bank capital to the service. The treasurer of a major pharma noted the operational efficiencies his company gained from pooling and asked about alternatives. The Cinderella sweep, where cash returns to individual accounts at midnight, may be one solution. Lobbying regulators about the importance of this transaction banking service, however, may be the ultimate solution.
Corporates are likely to find increasing challenges parking their cash, as new regs push banks to search for short-term investments stretching out beyond 30 or more days. Look out for creative new products to fill in the gaps, as well as signs that your providee of transaction banking services may be exiting the business. Contact banking regulators to persuade them of the importance of transaction banking services such as notional pooling.