Basel III and LCR Implications for Corporate Treasury—Navigating the New NormalMost of us do not need to be reminded about the implosion of Lehman Brothers and the ensuing reverberations of uncertainty experienced by the nation’s economy in 2008 and beyond. The tenuous economic climate that followed gave rise to reform measures in the form of Basel III. With these measures the Basel Committee on Banking Supervision established the framework for a comprehensive and more strictly defined set of capital standards designed to enhance the resiliency of bank balance sheets as well as prevent a bank funding crisis during periods of market instability. These standards come in the form of the Liquidity Coverage Ratio.

The Basel III rules were first applied to the largest U.S. banking institutions this year and will continue to be implemented through 2019. The rules present both challenges and opportunities for banks and corporate practitioners, which will be forced to reassess the alignment of customer needs with banking services. At the core of this assessment are potentially higher costs as a result of compliance with Basel III that will encourage corporate treasurers to evaluate banking relationships in order to maximize value. Intrinsic to this evaluation is the Liquidity Coverage Ratio, or LCR.

Liquidity Coverage Ratio basicsBanks’ access to stable and accessible sources of liquidity is at the heart of the LCR rule. By taking an extremely granular look at the composition of banks’ deposit and loan customers, LCR aims to ensure that financial institutions understand the sources of near term liquidity that will be available in adverse market conditions, while:

•strengtheningbanks’capitalandliquidity;

•assigninginflowandoutflowratestospecificproductsandcustomertypes;and

•mandatingthatbanksmaintainenoughreadilyavailableHighQualityLiquidAssets(HQLA)tomeetliquidityneedsinaneconomicstressscenario.

Tiered implementationThe U.S. version of LCR, implemented for the largest banks in 2015, has created multiple levels of compliance for financial institutions based on asset size that can be categorized as standard, modified or not subject to LCR.

Standard Approach•Institutionswithgreaterthan$250Binassets•SubjecttofullLCRprovisionswithnomodifications

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for more informationabout Basel III, or to find how Regions can help your business, call Clayton Hollinhead, CTP, Vice President, Commercial Deposits Manager, at (205) 264-4723 or email him at Clayton.Hollinhead@regions.com.

Visit www.bis.org for more about Basel III and the timeline for full implementation.

Modified Approach•Institutionswithassetsbetween$50Band$250B•Outflowprovisionsarereducedby30percenttolessenthecomplianceburden

The financial crisis tested banks’ liquidity buffers and proved that some banks were unable to withstand the stress imposed by unstable market conditions. LCR increases the required liquidity buffer levels and in the same stroke challenges the historic relationship model between banks and corporates. Although LCR does not impose any regulation directly upon corporate institutions, the manner in which banks must comply with LCR will undoubtedly and directly affect client relationships.

Broad relationships are keyBanks will be able to offer clients better pricing for products and services when liquidity shortfalls can be offset by deeper relationships.

Loan structure impacts liquidityTheratesatwhichunfundedloancommitmentsareassumedtoflowoutoffinancial institutions are based on client type and product structure. Liquidity facilities will receive more punitive treatment compared to credit facilities under LCR.

Not all deposits are created equalBanks’ need for customer deposits will increase due to LCR, but the deposits that provide the most liquidity and receive the most favorable treatment will be more highly valued. Deposits are valued based on qualities such as the purpose of funds, customer type and collateral requirements.

Desirable deposits under LCR:•Depositsusedforacorporate’soperatingneeds

•Fullyinsureddeposits

•Escrowdeposits

•Depositsfromsmallbusinessandretailcustomers

Less-desirable deposits under LCR:•Depositsprovidedbyanon-regulatedfund

•Non-operational(orexcess)depositsfromanyfinancialentity,e.g., insurance firms

•Collateralizeddeposits

•Deposit-onlyrelationships

The takeaways for corporate treasurers•ThenewLCRrulespresentanopportunitytoreevaluatecashmanagement

practices and banking relationships

•Anticipateoff-balancesheetandalternativecashmanagementsolutionsfornon-operationaldeposits

•Haveongoingdialoguewithyourrelationshipmanagementteamtostayupdated on LCR implications

putting cash mgmt systems in placeDeveloping a structured process for cash management is important to optimizing your business operations. Learn more by visiting regions.com/Insights/Commercial/Finance/Cash-Management-Systems

Treasury Management AdvisorIssue 107