NEW LIQUIDITY RULES FOR BANKS
"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various categories of depositors and funding instruments, the purpose being to prioritise deposits less likely to be withdrawn at short notice during bank stress situations.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are least useful for banks in managing their liquidity requirements because being 'at call' they can rapidly be withdrawn.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.
BANK DEPOSIT PRODUCT PRICING AND DESIGN
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.