Liquidity Management in the New Era

Regulatory Update

Jeff Avers

Director, Corporate Liquidity Specialist

April 2015

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Regulatory Reform: “Strengthened but not Simplified”

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Higher bank interest expense on deposits

Reduced Revenue Streams

Volcker Rule

Potential divestitures

Reduced Fee Income

NSF/Overdrafts (Regulation E)

Debit Interchange (Durbin Amendment)

Increased Balance Sheet Costs

Basel III Capital Ratios

Basel III Liquidity Coverage Ratio

Increased Fees

Uncollateralized daylight overdrafts

FDIC

2a-7 Money Fund Reform

• 2010 Changes

• 2016 Changes

Development costs for new products Employee training

Reduced value of deposits

Reg Q repeal

Basel III - Higher liquidity levels needed to

support the commercial business

Increased cost of compliance & oversight

Human, Systems, tracking and reporting

Increased emphasis on minimizing marginally

profitable and unprofitable relationships

Discontinuation of “Free Checking”

Collateralized Deposits

Syndicated Credit Facilities

Increased Bank Expenses Increased Customer Expenses

Regulatory Reform – A Sampling

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Banks: 2008 – 2012

Fed Funds Target lowered from 4.25% 1Q 2008 to 0-.25% 4Q 2008

Unlimited FDIC Insurance: late 2008 through December 2012

FDIC Coverage raised from $100K to 200K per depositor

Regulation Q Repealed

Money Funds: Implemented 2010

Max Weighted Average Maturity reduced from 90 to 60 days

30% of portfolio must mature within one week and 10% must mature overnight

Max of 2nd tier securities reduced from 5% to 3%

2nd tier issuer limit reduced from 1% to 1/2%

Max maturity of 2nd tier securities reduced from 397 to 45 days

Key Regulatory Changes Impacting Liquidity Management

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Corporate Cash Has Been Increasing

Grew from $500 Billion in

1988 to more than $2.2

Trillion at the end of 2013

Checkable deposits as a

percent of Corporate Cash

have increased steadily

since 2008 • Relative Value of ECR

• Unlimited FDIC through

12/31/2012

• Declined from 25% in 1988

to 1.9% in 2008 , before

growing to 20% in 2013

Trends In Corporate Cash

Source: Federal Reserve Bank

Source: Federal Reserve Bank

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Liquidity Solutions (Market Benchmarks)

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MARKET RATES FOR CASH INVESTMENT INSTRUMENTS

Market Benchmarks 2015-03 2015-02 2015-01 2014-122014

High

2014

Low

2014

Average

3 year

Average

5 Year

Average

Fed Funds Effective Rate1 FFE 11 bps 11 bps 11 bps 11 bps 13 bps 6 bps 8 bps 10 bps 12 bps

30-Day Nonfinancial Commercial Paper1 CP 8 bps 8 bps 9 bps 11 bps 17 bps 3 bps 7 bps 9 bps 11 bps

30-Day Financial Commercial Paper1 CP 9 bps 10 bps 12 bps 11 bps 13 bps 4 bps 8 bps 9 bps 12 bps

Repurchase Agreements2 Repo 19 bps 13 bps 13 bps 18 bps 25 bps 2 bps 9 bps 13 bps 14 bps

1 Month U.S. Treasury1 UST 2 bps 2 bps 2 bps 3 bps 7 bps 1 bps 3 bps 5 bps 6 bps

1 Month Eurodollar Deposit Rate1 Euro$ 19 bps 19 bps 19 bps 18 bps 20 bps 17 bps 18 bps 22 bps 27 bps

1 Month LIBOR3 1M LIBOR 18 bps 17 bps 17 bps 16 bps 17 bps 15 bps 16 bps 18 bps 21 bps

3 Month LIBOR4 3M LIBOR 27 bps 26 bps 25 bps 24 bps 26 bps 22 bps 23 bps 28 bps 32 bps

Crane Treasury Institutional MF Index5 MMF 1 bps 1 bps 1 bps 1 bps 1 bps 1 bps 1 bps 1 bps 1 bps

Crane AAA Prime Institutional MF Index5 MMF 4 bps 3 bps 3 bps 3 bps 3 bps 2 bps 3 bps 6 bps 7 bps

5 Source: Crane Data. 7-Day Yield

1 Source: http://www.federalreserve.gov/releases/h15/data.htm2 Source: http://www.dtcc.com/charts/dtcc-gcf-repo-index.aspx3 Source: http://research.stlouisfed.org/fred2/series/USD1MTD156N4 Source: http://research.stlouisfed.org/fred2/series/USD3MTD156N

Rates continue to be at or near historic lows

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Deposits Share of Corporate Cash Has Grown Significantly

Have Replaced MMF Investment Allocations May Return to

Pre-2008 Levels

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Cash investors have been increasing their allocation to bank deposits over the last seven years,

while simultaneously decreasing their allocation to money market mutual funds

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New & Proposed Regulatory Changes Impacting Liquidity Mgt

Basel III LCR

2a-7 Reform

Reg Q Repeal

Fed Policy

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Subject to Full LCR Subject to Partial LCR Not Subject to LCR

U.S. Bank Holding

Companies with ≥ $250

billion in total

consolidated assets

U.S. depository

institution holding

companies with ≥ $50

billion in total

consolidated assets

U.S. bank holding

companies (BHC) or

Savings & Loan Holding

Companies (SLHC ) with

< $50 billion in total

consolidated assets

*Includes the top 9 US

Banks ranked by assets as

of 12/31/2014

*Includes the 10th through

33rd largest US. banks

ranked by assets as of

12/31/2014

*Includes the remaining

U.S. banks and bank

holding companies

* Source: SNL Financial Rankings as of December 31, 2014

Basel III Liquidity Coverage Ratio

The LCR requires a banking organization’s stock of unencumbered high-quality liquid

assets (HQLAs) to be at least 100% of its total net cash outflows over a 30-day

standardized supervisory liquidity stress scenario

Per the Securities and Exchange Commission:

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Parent Company Assets ($B) As of 12/31/2014

Ass

ets

≥ $

25

0 b

illio

n 1 JPMorgan Chase 2,416

2 Bank of America 2,102

3 Citigroup 1,881

4 Wells Fargo 1,527

5 Bank of New York Mellon 374

6 U.S. Bancorp 364

7 PNC Financial 320

8 Capital One 297

9 HSBC North America 290

Assets

≥ $

50 b

illio

n 10 State Street 243

11 TD Bank US 235

12 BB&T 182

13 SunTrust 175

14 American Express 153

15 Ally Financial 151

16 Charles Schwab 144

17 Fifth Third 130

Parent Company Assets ($B) As of 12/31/2014

Assets

≥ $

50 b

illio

n

18 M&T 124

19 USAA 122

20 RBS Citizens 122

21 Regions Financial 117

22 BMO Financial 111

23 UnionBanCal 106

24 Northern Trust 103

25 KeyCorp 93

26 BancWest 84

27 Discover Financial 79

28 Santander USA 77

29 BBVA Compass 72

30 Deutsche Bank Trust 67

31 Comerica 65

32 Huntington

Bancshares

59

33 Zions BanCorp 56

Basel III Banks

Source: SNL Financial Rankings as of December 31, 2014

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Deposit Runoff Factors

Basel III Liquidity Coverage Ratio: Deposit Behavioral Issues

Stock of Highly

Liquid Assets

Stable

Deposits

(3 -5% Runoff)

Less Stable

Deposits

(10% Runoff)

Wholesale

Operational

(25% Runoff)

Other

Wholesale

Non-Financial

(40% Runoff)

Other

Wholesale

Financial

(100% Runoff)

Under the LCR standard, each

dollar of assumed runoff

requires an offsetting dollar

of liquid asset buffer. Runoff

assumptions will therefore

have a significant impact on

deposit profitability.

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Retail/Consumer

and

Small Business

Wholesale

Basel III Liquidity Coverage Ratio

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Credit Risk: Depositors have a preferred claim

DIC National Depositor Preference Rule

Order of Settling Claims in the Event of a Bank Failure

1 Administrative Expenses of the Receiver

2 Any Deposit Liability of the Institution • Insured Deposits are settled first, followed by uninsured deposits

• Eurodollar and other offshore deposits are considered a general creditor

obligation

3 Any Subordinated Obligations

4 Any Other General or Senior Liabilities of the Institution

• This includes offshore deposits

5 Any Obligation of Commonly Controlled Depository Institutions for Cross-

Guaranty Assessments Under 12 U.S.C. §1815(e)(2)(C)

6 Any Obligations to Shareholders or Members (including Holding

Companies and their Creditors

Source: Federal Deposit Insurance Corporation

FDIC National Depositor Preference Rule

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Credit Risk: Depositors have a preferred claim

DIC National Depositor Preference Rule

Announced by Moody’s on March 17, 2015

Previous

Approach

• Each bank is assigned a single overall long-term rating

• Deposits and other forms of unsecured long-term debt are

considered as part of the bank’s long-term debt structure

New Approach • The bank is not assigned an overall rating

• Individual classes of long-term debt are each assigned their

own rating

• Deposits are given their own unique rating

• Long-term unsecured debt is given it own unique rating

Net Effect Deposits will likely be rated higher than a bank’s unsecured

debt in recognition of the depositor’s preferential claim over

that of general creditors

Source: Moody’s Investors Service

Changes to Moody’s Bank Rating Methodology

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2014 SEC 2a-7 Money Fund Reform

October 2016 Implementation

Net Asset Value

Prime and municipal funds convert to “floating NAV”

- NAV to be calculated to 4 decimal places ($ 1.0000)

Treasury and government funds remain stable NAV

Liquidity Fee

Weekly liquid assets < 30% ► Fund Board may impose a 2% redemption fee

Weekly liquid assets < 10% ► 1% redemption fee

- Fund Board can determine otherwise

Redemption Gate

Weekly liquid assets < 30% ► Fund Board may suspend redemptions for up to 10

days

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Potential Impact of a Limit on or Charging of Fees for Full

Redemption of MMF Holdings on Organization's Willingness to

Invest in MMF’s

Money Fund Reform: 2013 AFP Liquidity Survey

55%+

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Potential Impact of a Floating NAV on Organizations’

Willingness to Invest in MMFs

Money Fund Reform: 2013 AFP Liquidity Survey

65%

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When Interest Rates Rise, The Repeal of Reg Q1 plus Money Fund Reform

Could Drive Corporate Cash Balances onto Bank Balance Sheets…

Provided the Banks Want the Liquidity

Percent of Total Corporate Liquidity Held in Bank Deposits*

This is a positive outcome

for U.S. banks only if loan

demand and deposit growth

are in synch

*Source: 2010 AFP Liquidity Survey and Treasury Strategies’ Global Liquidity Research

¹ Repealed in 2011, Regulation Q was a 1930s Depression Era regulation that disallowed banks from paying interest on commercial checking accounts

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0%

20%

40%

60%

80%

USReg Q

FrancePost-Reg

Q

UKNo Reg Q

In countries allowed to pay interest on checking, corporates maintain 60-70% of

their liquidity in the banking system

Impact of Reg Q Repeal

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Post Reg Q Repeal, the Primary Purpose of Sweep Has Changed

Primary Purpose of Sweep

Old Paradigm Post-Reg Q

Obtain yield on idle cash balances Diversify away from bank risk

Obtain yield in excess of interest-bearing DDA

Predominant Sweep Vehicles

Money Funds

Eurodollar Deposits

Repo

Bank Parent Commercial Paper

Repo (eliminate credit risk)

Money Funds (diversify away from bank risk)

Bank Parent CP (yield enhancement)

Alternative ‘off balance sheet’ products

The Impact of Reg Q Repeal: The Future of Sweep

Source: Treasury Strategies’ proprietary research; Commercial

Deposit/Sweep Study & Global Corporate Liquidity Research

$-

$100

$200

$300

$400

$500

$600

$700

$800

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD

Total U.S. Sweep Balances ($B)

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Will Deposit Investment Allocations Return to Pre-2008 Levels

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Cash investors have been increasing their allocation to bank deposits over the last seven

years, while simultaneously decreasing their allocation to money market mutual funds

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Source: 2013 AFP Liquidity Survey

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Will Deposit Investment Allocations Return to Pre-2008 Levels

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57%

49%

33%

13%

Yield in Alternative Options

CAPEX/Acquisitions Credit Exposure MMF Reform

Factors Affecting Cash Held in Bank Deposits

Source: 2013 AFP Liquidity Survey

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Summary of Today’s Discussion

SunTrust Bank, Member FDIC. SunTrust is a federally registered service mark of SunTrust Banks, Inc. 04/13

Basel III LCR

2a-7 Reform

Reg Q Repeal

Fed Policy