A deposit is no longer just a deposit

At the start of this year, the Australian Prudential Regulation Authority (APRA) implemented its version of the Basel III short-term liquidity reforms. Aimed at ensuring banks hold greater amounts of highly liquid assets (that is, those that are or can quickly become cash) and reduce their reliance on short-term funding, the Liquidity Coverage Ratio (LCR) framework tests the run-off characteristics of banks' funding liabilities over a 30-day stress period.


"There is now a hierarchy of deposits considered 'valuable' by regulators for banks under the new short term liquidity rules."
Phil Carmont and Kevin Wong, Head of funds and insurance, Australia and Director, client insights and solutions

The framework is highly prescriptive in terms of the run-off assumed for various categories of depositors and funding instruments, the purpose being to prioritise deposits less likely to be withdrawn at short notice during bank stress situations.

Deposits from the retail market and small to medium-sized enterpries are considered very 'sticky' relative to wholesale client deposits. Within wholesale banking, a distinction is made between financial institution and non-financial institution monies, where the former are generally considered to be fully at risk of run-off in the stress test period.

There is now a hierarchy of deposits considered 'valuable' by regulators for banks under the new short term liquidity rules.

For example, a wholesale client's operational deposits that form part of a proven clearing, custody or cash management/transaction banking relationship with its bank are considered by APRA as highly 'sticky', given the client's dependence on the bank's services during the 30 day stress period.

Long dated or 'evergreen' deposits with tenor much longer than 30 days are also important given the opportunity for the bank to invest those funds in longer dated, higher-yielding assets.

These examples apply to wholesale financial institution clients as well. Uniquely for the industry, intermediated deposits – where a financial institution collects and aggregates deposits from numerous individual retail depositors – may also receive preferential treatment under the right circumstances.

At-call deposits from financial institutions, in the eyes of regulators, are least useful for banks in managing their liquidity requirements because being 'at call' they can rapidly be withdrawn.

Because of this new hierarchy, banks will be more granular in how they source, manage and pay for different funding sources, especially client deposits.


The new Basel III LCR reforms have major implications for the pricing and design of deposit products. This hierarchy of APRA-designated “valuable” deposits will naturally result in differentiated pricing.

We already see anecdotal evidence of lower bank pricing for pure at-call deposits from financial institution customers after January 1 2015. Of course, commercial factors such as a bank's overall relationship with a customer are important, so deposit pricing is not driven purely by regulatory reform.

Product design implications can be seen with the introduction of 30 days+ notice period deposits. These are designed to ensure there is no run-off during the regulatory stress period, with some banks ascribing more value for longer notice periods.

On ANZ's part, we have also been working with a range of financial institution clients on solutions for intermediated monies that achieve superior treatment under the LCR rules and hence better yield outcomes.

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It is clear the new LCR framework will have flow-on implications for bank clients and their deposits. Financial institution clients will have to re-consider the balance of their cash liquidity, yield and operational objectives in the context of these bank reforms.

For example, client liquidity requirements typically mean holding cash in at-call accounts – however, such deposits are least 'valuable' from APRA's perspective, and therefore likely to be paid a low rate. That means cash yield objectives may have to be achieved with much longer dated deposits than prior to the new Basel III reforms.

With the new rules only just implemented, banks are focussing on deposit product development – i.e. Basel III-friendly products – as highlighted earlier. There is also a window of opportunity for financial institutions to work with their banks to achieve innovative outcomes that maximise benefit for both parties.

As the balance of liquidity, yield and operational requirements will differ from client to client, we anticipate that a more tailored, holistic approach to cash management and deposit solutions will be the theme in the post-Basel III world.


  1. What are the appropriate amounts of cash I need for liquidity, yield and operational objectives in the context of my business?
  2. What bank products or solutions can help me achieve the right balance of outcomes?
  3. How can my bank help me better analyse my needs and the options available?

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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