Corporate Treasurer’s feeling the impact of Basel III

The effects of Basel III regulations are forcing banks to re-evaluate the way they take on shorter-term deposits. This is creating challenges for corporate treasurers who are now looking for alternative places to keep their corporate cash - particularly when it comes to cash assets generated from international operations.

“Many South African companies have large offshore cash reserves generated from international operations. The increasing reality however, is that banks are becoming less and less willing to take on these corporate cash deposits as they struggle to balance the liquidity requirements imposed by Basel III. As a result, corporate treasurers would do well to consider other, better yielding strategies of cash management,” says Sean Segar Head of Nedgroup Investments Cash Solutions.

The current Basel III regulations are characterised by three ratio requirements that banks must adhere to:

1. The liquidity coverage ratio which aims to ensure that banks have enough liquid assets to fulfil their short-term cash obligations under severe stress testing. This focuses on a bank’s short-term obligations and requires that banks hold an amount of High-Quality-Liquid-Assets (HQLAs) equal to or greater than their net cash outflows over a 30 day period. This ratio is driving banks’ desire for more HQLAs.

2. The net stable funding ratio which ensures that banks are financing loans/assets and other commitments with stable funding sources. This ratio creates an additional pull-effect towards HQLAs.

3. The leverage ratio which measures the amount of a bank’s Core Tier 1 Capital as a percentage of its on- and off-balance sheet assets. Core Tier 1 Capital is increased by raising common equity or by increasing a bank’s retained earnings. Therefore, as a bank’s balance sheet grows, their obligation to increase Core Tier 1 Capital also grows and this incentivised banks to shed low-yielding HQLAs.

The net effect of satisfying all of these ratios is that for international banks, providing many short-term deposits may no longer be financially attractive or operationally feasible. This is reflected in a recent report from BlackRock, which noted a ‘decrease in banks appetite for non-operating balances under 30 days and an increase in appetite for cash management activity and deposits over 30 days’. These regulations also drive banks to favour retail depositors over corporate depositors.

Corporate treasurers who have always relied on traditional bank call accounts to manage their liquid cash reserves, lose out on both these measures. This creates a new challenge as banks are paying lower interest rates to corporates, especially for short term deposits.

Segar points out that this situation creates an opportunity for Corporate Treasurers to find alternative means of parking cash reserves – such as Money Market funds and other cash investment solutions.

“By moving corporate cash reserves into a Money Market fund, treasurers can not only achieve a much better yield on their investment – but they can also retain their liquidity on both non-operating and operating cash balances. Furthermore, the highly regulated environment of the money market industry and the easy access to their funds should they need it, means treasurers actually don’t forgo any of the convenience and liquidity of a call account,” he says.

In order to accommodate the increasing demand for investment opportunities for offshore US Dollar cash reserves, Nedgroup Investments has partnered with BlackRock and recently announced the launch of a new a US Dollar Money Market fund. “Funds like this one mean that while banks are pushed to seek longer-term deposits to meet their funding obligations, corporate treasurers can still overcome the complexity of operating in global markets and put their dollars to work in a simple and convenient investment,” he says

Segar says there is still a lot of “lazy money” around, especially the US Dollar balances of South African corporates and the opportunity to generate an additional one or two percent yield on cash reserves is an often overlooked opportunity that if seized can make a significant difference for a company.