The talk at AFP’s Annual Conference last week by David Tademaru, Assistant Treasurer at Ingram Micro and Deutsche Bank’s Lisa Rossi, Global Head - Structured Liquidity Products brought real clarity to the complicated subject of exactly what impact the Basel III banking regulations will have on corporates. This session was packed, which shows how US corporate treasuries now realise this will impact them as well.  

Banks view
After describing the aims of Basel III and how it is getting more complicated (Basel III rules take 616 pages compared to 30 pages for Basel I), Rossi quoted Stefan Walter, Secretary General, Basel Committee of Banking Supervision who said that “No doubt, this [Basel III] will raise the cost of funding normal times and have an impact on business models…” Rossi’s conclusion was that Basel III will impact banks, but its effects are expected to ripple through to corporates by changing:

• the value of bank deposits
• the access to bank credit and pricing
• corporates will need to tighten cash forecasting and enhance their risk management.

The impact of the new Basel III measures were summarised in this chart:

Source & Copyright©2013 -  Deutsche Bank 

Having made the point that systemically important banks, like Deutsche Bank, are being asked to have additional loss absorption capacity and so will have to adjust their business models accordingly, Rossi suggested that the new regulations would lead to liquidity products for Basel III:

Source & Copyright©2013 -  Deutsche Bank 

Corporates view
David Tademaru explained why he believes that Basel III is not just a ‘bank thing’, it may impact corporates in various ways. Tier 1 capital leverage ratio potential impacts:

• increasingly bank will ask for other revenue and/or loan repricing
• corporates will need to resize loans to limit unused liquidity and bifurcate facilities into committed and uncommitted
• a decrease in repo investment opportunities
• shift in OTC derivative business practices.

Tademaru believes that corporates may need to review strategically:

• their banking relationships:

1. Where are your banks in meeting their Basel III metrics?
2. Do you have the right bank group to meet your needs?

• consider your industry: 

1. How do your credit needs fit into the bank’s balance sheet?

• start negotiations early:

1. Where do you stand?  Where do you need to be? (Ingram Micro has already completed some negotiations)

• be prepared to be flexible in adapting to regulatory impacts because:
  1. requirements may take significant time to be finalised, making ultimate costs difficult to ascertain in the near-term
  2. country interpretations of Basel III changes are not completely stable, i.e. there are likely to be more changes, so corporates need to keep up-to-date with Basel III progress.

Tademaru expects that as a result of the new Basel III Liquidity Coverage Ratio and the Net Stable Funding requirements that banks will push for longer-term deposits, and their pricing will reflect these new regulations. This means that corporates will need to consider strategically whether: 1) they want to give banks longer term deposits, 2) they will be happy with banks offering more fees in lieu of balances, 3) the counter-party risk of being locked in to a bank, and 4) their investment allocation guidelines need to be changed.

His overall conclusion was that the basic maths of Basel III mean that need for corporates to optimise their working capital becomes even more important with particular emphasis on:

• achieving full visibility of your cash balances
• gaining access to trapped liquidity
• improving accuracy and reliability of cash flow forecasting because banks will need to know the behaviour and tenor of all deposits
• ensuring that your money is where and when you need it
• avoiding overdrafts and investing idle balances.

In the Q&A at the end of session several key points emerged:

• it is not clear whether major alternative non-bank sources of capital and investment will emerge. Some thought that yes, while others expected banks to offer more innovative products and solutions
• assessment of counter-party risks will still use current tools, e.g. CDS spreads. An increasingly important aspect will be the intra-day liquidity of banks
• corporates will see the impact of Basel III in the next 6-12 months as banks are already changing their liquidity management procedures and limits
• corporates need to understand how each bank is applying Basel III as their interpretations will vary considerably. 

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In some ways, the new Basel III regulations are a revolution which corporates need to keep track of and factor into their funding and investment strategies, but remember that they haven’t actually changed the basic requirement for corporates to take care of and optimise their working capital.