The Treasury Strategies ‘Cash Briefing’ and discussion on 9 April inevitably repeated what many corporate treasury departments know already: the LCR part of Basel III will significantly alter the economics of a banking relationship both from the corporate’s perspective and the bank's perspective, as banks are having to reclassify corporate deposits into ‘operational’ and ‘non-operational’, and that the impact will vary by bank and by corporate.

The attractiveness of corporate deposits will depend on: the volatility of your cash; corporates ability to forecast accurately their cashflows; the mix and amount of bank services bought; the nature of the business activity - commercial v. financial transactions; and the legal arrangement of the account. Not surprisingly, Treasury Strategies, as consultants to their finger tips, did not miss the opportunity to stress that, “It is likely that at some point, you will need to redesign your operational banking structure or reallocate your deposits.” 

Basel III also raises many questions for banks, including: do they have the ‘right’ mix of corporate clients? what is the optimal mix of spread vs. fee revenue? how to keep the ‘good’ clients and attract new ‘good’ clients? 

The Game Changers

The panel* then discussed several Game Changers in the cash management space, items of interest were:

Legislators are insisting banks ring fence ‘risky’ parts, e.g. investment banking, of their operations from the rest of the bank, e.g. consumer banking: 

• ACT are concerned, feel that it may be more sensible for corporates to be outside a ring fence, than inside because there are real issues with bail-in provision. Deposits in a ring fenced bank turns them, effectively, into equity holders but without a stake or vote. Other issues are: what activities are inside or outside the ring fences, and how other jurisdictions won’t have such arrangements; consumer banking can be as risky as wholesale/investment banking
• Citi - seeing several other ring fencing efforts by the regulators in other countries which will lead to banks varying by jurisdiction as to whether keen to accept deposits or not
• Federated - welcome the steps that make it easier for their credit analysts to understand more clearly the differentiation between bank investment products.

Money Market Funds where European parliament is set to vote at end of month on the new rules:

• Federated: Vote is on - exemption to floating NAV requirement for public debt funds, floating NAV exemption for retail funds, proposal for low volatiliyt net asset product with maturities of 90 days or less which are valued at amortised cost
• Federated expect alternative products which will provide investors the same level of flexibloe liquidity that they have today, e.g. money market portfolios that only invest in 60 days (or less) securities or even funds that only invest in 90 day securities, separate accounts, private funds that are less regulated and a ‘little more flexible’
• Citi money market fund survey in the US showed that of the $930bn in institutional prime funds the expectation is that $200-400bn would be expected to leave as result of then new money market fund rules much of which would go to US government funds which could ‘work its way’ to bank deposits
• Citi expect that as rates rise then investors will more willing to spread their funds to a range of investments including to floating NAV prime funds and to alternatives, such as separately managed funds, etc. to achieve greater yield
• Fitch reminded the panel that the implementation period for the new regulations is nine months (US is 2 years) which will require rapid changes by the service providers to adopt the new rules PLUS there is also negative % rates which is huge mix of change
• ACT - if the new regulations remove rating of money market fund products, corporate treasurers will STOP investing in MMFs (there was some disagreement as to whether this will be implemented); time to implement the new MMF standards is ‘unreasonable’ and impossible as far as most corporates are concerned.

Banks charging for deposits, trimming deposits and lines of business:

• Citi - overall this is a result of Basel III and the LCR; but for most corporates the situation is not as dire as it sounds as there are new products, e.g. 31+ Time Deposits, and off balance sheet structures
• Federated - looking at the credit perspective of the new deposit situation is actually an improvement, and at same time need to ensure that you understand your bank and what their strategy is: 
• ACT - the global bank model and the ‘all things to all men’ bank model are dead; the ideal of anywhere with same bank is also dead; today corporates need to sit down with their bank(s) to work out where they can help, and where they need to use other bank(s)/service providers.

Taxing of excess corporate cash - not discussed in any detail, other than to list where it is being considered:

• South Korea: already there is a regulation that taxes excess corporate cash
• Japan: being discussed.

———

Treasury Strategies - Tony Carfang, Monie Lindsey

ACT - Peter Matza, Federated - Susan Hill, FitchRatings EMEA - Alastair Sewell, Michael Berkowitz - Citi, USA