Transcript Slide 1

BASEL III
A NEW PHASE OF LIQUIDITY MANAGEMENT FOR
FINANCIAL INSTITUTIONS?
Kevin Wong, Director
Client Insights & Solutions
International & Institutional Banking
23 February 2015
Background: the Basel III response to the GFC
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In the view of banking regulators, the GFC exposed several key weaknesses in the
global banking industry – capital, liquidity and leverage
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Basel III is a complex, multi-faceted, multi-staged set of banking regulatory reforms
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Global ‘base’ rules, but national differences
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Milestones
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
1 Jan 2013: Capital – quantity and quality

1 Jan 2015: Liquidity Coverage Ratio (LCR) – short term liquidity
‒
1 Jan 2018: Net Stable Funding Ratio (NSFR) – longer term liquidity/’match
funding’
‒
1 Jan 2018: Leverage Ratio – on- and off-balance sheet leverage
Direct impact on banks; indirect impact on bank customers, counterparties and
investors
Liquidity Coverage Ratio (LCR)
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The new LCR framework took effect from 1 Jan 2015. The objective is to ensure
that banks have sufficient, high quality liquid assets in an acute short-term
liquidity stress scenario
High Quality Liquid Assets (HQLA)
≥ 100%
Net cash outflows (30 days)
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Stress scenario is for a 30 day period
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HQLA comprises essentially cash, RBA reserves and govt/semi-govt bonds in Australia
‒
High quality but low yields
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Net cash outflows represent highly prescriptive ‘run off’ assumptions across different
funding liabilities of a bank
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Framework applies to larger/more sophisticated banks/ADIs, but the practical scope
seems broader
Run-off assumptions - retail vs. wholesale funding
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In the eyes of banking regulators, retail deposits are ‘stickiest’ while wholesale
financial institution deposits are considered the least ‘sticky’
> To illustrate – deposits with effective maturity of ≤30 days:
RUN OFF
PRESCRIBED
COMMENT
RETAIL, SME
TYPICALLY
5-10%
> Higher value deposits/on-line accounts/lack of customer
relationship may lead to 25% run-off prescribed
WHOLESALE OPERATIONAL
25%
> Proven clearing, custody or cash management relationship
WHOLESALE – NON-FI
40%
> Considered ‘stickier’ than FIs
WHOLESALE – FI
100%
> Note APRA’s broad definition of “Financial Institutions”
DEPOSITOR TYPE
> In other words, a bank has to hold:
4-8x
‒ $0.05-0.10 in cash/RBA reserves/govt bonds for a $1.00 Retail deposit
‒ $0.40 in HQLA for a $1.00 wholesale non-FI deposit
2.5x
‒ $1.00 in HQLA for a $1.00 wholesale FI deposit
vs.
vs.
So what are banks’ preferences under LCR?
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It’s worth thinking about this from a
time perspective…
0-30
days
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31 days – up to
364 days
… and from a client
category perspective
1
year+

Retail/SME

Wholesale Operational
– FI and non-FI

Wholesale – non-FI

Wholesale – FI
Term deposits of at least 31 days BUT:
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Evergreen/rolling is better
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Notice period is better
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Longer term is better
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12 months+ is also a consideration as
banks consider future regulatory reform on
term/match funding
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6 months+ may provide additional bank
benefit from a regulatory perspective vs <6
months?
‒
Watch this space…
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Banks are becoming more
granular in viewing and
differentiating client
deposits
‒
Segment
prioritisation
‒
Rates offered
The decision tree on FI deposits
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NO
Is remaining tenor ≤30 days?
0% Run-Off
YES
Is deposit from a Financial
Institution (FI)?
YES
Retail ‘look-through’ treatment
– FI intermediary has no
obligation/ability to act without
retail clients’ instructions
Are withdrawal /deposit
decisions made by the
underlying retail customer?
YES
NO
[25%] Run-Off
Is deposit on a transactional
platform and required for
company operations?
NO
100% Run-Off
YES
Only that portion of the deposit
proven to serve operational
needs can qualify as stable
YES
25% Run-Off
What is a “Financial Institution”?
“… includes any institution
engaged substantively in one or
more of the following activities –
banking; leasing; issuing credit
cards; portfolio management
(including asset management and
funds management);
management of securitisation
schemes; equity and/or debt
securities, futures and commodity
trading and broking; custodial
and safekeeping services;
insurance (both general and life)
and similar activities that are
ancillary to the conduct of these
activities. A financial institution
includes any authorised NOHC or
overseas equivalent”
“For the avoidance of doubt, this
definition includes money market
corporations, finance companies,
friendly societies and the trustees
of superannuation/pension funds,
public unit trusts/mutual funds
and cash management trusts”
Intermediated deposits
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Subject to strict criteria, APRA will recognise certain retail deposits on wholesale
intermediary platforms as “retail” for purposes of the Basel III LCR framework
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Extract re “intermediated deposits” from APRA banking prudential standard APS 210 – Liquidity:
A new phase of liquidity management?
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Both clients’ and banks’ objectives can be better aligned with the appropriate cash
management solutions
BANK
Funding liability runoff requirements
Term funding
Customer relationship
and franchise
Full service bank
Return on capital
CUSTOMERS
Liquidity needs
Yield benchmark
Consistency of
returns
Diversity of provider
and counterparties
Overall banking
needs
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AUDIENCE QUESTIONS
Audience question 1
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Q. How do you prioritise the following objectives for cash management?
(Rank from most to least important)
A. Liquidity
B. Yield
C. Consistency of yield
D. Diversity of provider
Audience question 2
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Q. What have you seen happen in rates offered by banks for your cash
management/deposit needs over the past six months?
A. Increased
B. Decreased
C. Steady
Audience question 3
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Q. What do you anticipate will happen to cash management/deposit rates offered
by banks over 2015?
A. Increase
B. Decrease
C. Steady
Audience question 4
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Q. For super fund members that specifically leave money within the Cash option,
what do you believe they are primarily focused on?
A. Capital preservation
B. Liquidity
C. Certainty of returns
D. Maximising cash returns
Audience question 5
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Q. With a low rate environment persisting, what would you consider for enhancing
cash returns?
(Rank from most to least relevant)
A. Longer dated term deposits
B. More structured deposit products – e.g. notice period, rolling term deposits
C. Include non-cash, liquid investments – e.g. bank paper
D. Business model change – e.g. introduce member/intermediary platform
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