Dodd-Frank and Basel III capital requirements will continue to dog banks – and their clients – in the New Year. And to address this, many treasurers have begun analyzing the more closely the share-of-bank-wallet equation and estimating the ROE that the banks earn on that share. This has led to reviews of the commercial paper back-stop credit facilities that companies have with their bank group as well as of ways to improve relationships with banks.
One of the key takeaways from 2015, according to several meetings facilitated by The NeuGroup, is that banks are becoming increasingly vocal about not making enough money on their corporate relationships. As such they are working aggressively to gain additional ancillary business. But there is only so much business to allocate and members continue to struggle with balancing the banks’ wants and needs.
Some banks have gone so far as to turn down deposits and actually tell companies to bank elsewhere. In fact there are now good deposits and bad deposits. Prior to the financial crisis, banks supported and profited from technology-intensive transaction banking services by reinvesting corporates’ excess balances. Now banks may not want those deposits, at least in size, because regulators say only some are sticky, long-term operating cash (the good) and the rest could quickly in a pinch (the bad).
To combat this trend, many treasurers are looking for ways is to improve their relationship management – even when they have a strong urge to throw up their hands and move to another bank. But conversations can create opportunity and in some cases, new products.
For instance, although a 30-days-or-more, term-deposit is the simplest, most straightforward solution for deposits, new requirements have prompted bankers’ creative juices to flow, so treasury executives should expect a wave of pitches for alternative short-term investment products, that are “stress complaint,” that is, they satisfy Basel III concerns, especially about deposit run-off in stress scenarios. A perpetual evergreen facility that remains compliant until it is called may be one (e.g., a time deposit that converts to demand when called); pools with contributions from multiple client accounts that continually roll through a series of maturities may be another. Tri-party repurchase agreements (repos), likely to increase in popularity because they’re fully collateralized and thus not subject to the new requirements, allow corporates to choose their counterparties, type of acceptable collateral and investment term. The latter will also be part of a range of off-balance sheet products that transaction banks offer as part of liquidity management sweep structures.
Another way banking is changing is that the little guys could get left out. Historically, having a handful of small players in the bank facility was good for both sides: it helped build an additional bank relationship and allowed the bank to participate in a small way. Now however, things are different. Several members have asked small players to exit the bank facility to allow greater wallet allocation to strategic relationships. Small players are not happy; some were offended but left, while others refused to exit.
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 provider of transaction banking services may be exiting the business. Ultimately, treasurers may need to contact banking regulators to persuade them of the importance of transaction banking services to support their business.
Until then, as one banker noted at a NeuGroup meeting this fall, “Everyone’s life is becoming less fun. If your day is bad, our day is worse.”