by Steve Everett, Global Head of Cash Management, RBS
New liquidity rules could increase the cost of cash management and dent returns on corporate deposits. As a result, companies will require more sophisticated working relationships with their core banks. The rules, updated in January and due to be phased in from 2015, are part of the Basel III regulation which aims to ensure banks have enough capital and liquidity in reserve to prevent a future financial crisis. They are designed to ensure banks have a sufficient cash buffer in place to cover numerous and sudden withdrawals.
While January’s announcement actually lightened some requirements, the Basel III method for working out this buffer, the Liquidity Coverage Ratio, is still based on somewhat conservative assumptions for corporate deposits. This could lead to greater costs for banks and lower returns for their corporate customers. Across the industry these rules will fundamentally change the economics of many financial products. Banks will need to respond by reviewing product pricing and focusing on their core clients. Corporate deposits in general are likely to attract relatively lower returns than in previous years.
This means that companies will need to take a broader, more holistic approach to their banking relationships when managing cash to ensure a mutually beneficial partnership. It may encourage them to spread their business across fewer banks – a challenge considering the trend in recent years to work with more to spread counterparty risk.
Some potential good news is that the Basel III rules only apply to cash that can be withdrawn within 30 days. In the UK, it is currently 90 days under the country’s regulator, the Financial Services Authority. Although it is not yet confirmed whether the 90-day rule will disappear completely, this change will potentially drive new products and pricing at banks to encourage contractual terms longer than 30 days while reducing the counterparty risk involved for deposits.