The Need for Non-Bank Engagement on Proposed LCR Rules

February 13, 2014

By Joseph Neu

While the comment period for US prudential bank regulators’ Notice of Proposed Rulemaking (NPR) on the Liquidity Coverage Ratio (LCR) ended January 31, it is not too late to engage. Reading from the 100+ comment letters, mainly from banks and affiliated groups, most seek to underscore the unintended consequences that the NPR, which goes beyond the Basel III requirements, will have on vital economic activities. Many also point to the unintended consequences of the Volcker Rule, i.e., upon trust preferred bonds and collateralized loan obligations, that led to swift backtracking by regulators as reason to act similarly on the LCR NPR.

Bank treasurers, of course, are deeply engaged with the LCR rule’s impacts, but there are very good reasons for their peers at non-banks to be engaged, too.

Reasons for engagement

The key reason for non-bank treasurers to be engaged is to ensure that the banking services they rely on will continue to be available on reasonable terms. But a related reason is that bank regulators, according to a major global bank that contacted The NeuGroup recently, are very interested in hearing from corporate customers on how new regulations might affect them.

Along these lines, the National Association of Corporate Treasurers signed on to a comment letter with the Competitive Enterprise Institute, the National Association of Real
Estate Investment Trusts, the Real Estate Roundtable and the US Chamber of Commerce requesting that “the impactsof the proposed liquidity ratio rules upon non-financial companies be considered and that a roundtable of all participants be held to better understand these concerns and avoid the real-life adverse consequences as was recently witnessed [with the Volcker Rule].”

Their letter calls out a number of concerns for non-financial companies found in others:

  • The impact on credit facilities for structured products: the application of a 100 percent outflow factor in LCR calculations makes these equivalent to unsecured undrawn credit facilities (see the Structured Finance Industry Group/Securities Industry and Financial Markets Association letter);
  • The impact on derivative use, as the calculation of collateral outflows does not allow the offset of collateral inflows; and
  • The scoping in of non-bank financial companies that help facilitate customer transactions.

Non-bank treasurers should also consider the wide-ranging potential impact on transaction banking services.

  • Banks’ willingness to take deposits. The BAFT-IFSA, the leading international transaction banking association, notes how the LCR and leverage ratio are at cross-purposes: “For example, the LCR requires banks to hold HQLA in case of a liquidity stress scenario. These assets that are mostly held at Central Banks are counted into the leverage ratio exposure although they cannot actually be used for anything other than HQLA and are not a source of leverage. Additionally, when a bank takes cash deposits from its clients, the cash is either matched off against a loan (i.e. used as funding) or it is placed with a Central Bank. If it is placed with a Central Bank, an asset is created on the bank’s balance sheet which adversely impacts the leverage ratio Exposure Measure.

Accordingly, banks are penalized for deposit taking—a “basic” banking service.

Some MNCs looking to deposit sizeable amounts over year-end have already found transaction banks reluctant to accept them. And this says nothing about the sizable cash balances of “many stable and highly-rated companies,” deposited for an extended period of time that T30 Alumna Cathy Santoro, formerly treasurer at MGM Mirage and VP Finance at Walmart, notes in her letter.

  • Cross-border solutions hampered.The BAFT-IFTA also calls attention to the jurisdictional deviation from the Basel III LCR that the US NPR introduces. If other jurisdictions follow suit, this will hamper global banks’ ability to offer standardized global products. In addition, they call attention to the 100 percent outflow factor applied to deposits associated with correspondent banks and similar arrangements used to offer operational account-related services outside a bank’s own networks.

And the list does not end here.

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