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2 TREASURY & RISK SEPTEMBER 2014 SPECIAL REPORT treasuryandrisk.com

N

o relationships are more important to corporate treasurers than their

relationships with the banks that provide them with credit. But companies

ties to their banking partners could be strained in coming years as large banks

adjust to the new capital requirements set forth by Basel III. At the same time,

companies growing use of SWIFT and other services to link to their banks may make it

easier for corporate treasuries to shuffle their banking relationships.

The implementation of Basel III capital

requirements is expected to push the cost of

credit higher and make banks a little choosier

about which companies they offer credit.

Meanwhile, Basel IIIs liquidity coverage

ratio, which evaluates a banks ability to funditself over a 30-day period of financial stress,

puts a premium on companies operational

balancessuch as those associated with

payroll or accounts payableon the grounds

that such deposits will be stickier. Short-term

deposits that are not linked to operations will

become less attractive to banks, since bankswill be required to hold more reserves against

those deposits. And Basel IIIs leverage ratio

could limit the total amount of lending banks

are able to do.

Different countries will implement the

Basel III capital requirements in different

timeframes; in the United States, the rulesstart to kick in at the beginning of next year.

Banking On It
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Opportunity Knockson the Future of ISO 20022

Tom Durkin, Managing Director,Global Head of Integrated Channels, Bank of America Merrill Lynch

SPONSORED STATEMENT

Expanding the functionality

of ISO 20022

In 2009, ISO 20022 restructured and

expanded the message sets for pay-

ments initiation, payments clearing and

settlement, exceptions and investiga-

tions and numerous other areas, based

on experience in actual implementa-

tion and usage experience. The results

have been very successful as ongoing

versions of the message sets have

been updated and built on that base.

However, there remain many potential

applications for ISO 20022, some of

which could help corporates to achieve

long-cherished goals.

Currently, message development for

specific business needs are underwayin the payments domain in four impor-

tant areas: remittance advice; real-time

payments; account switching; and

invoice tax reporting.

To accommodate the growing need for

robust remittance information associ-

ated with a payment, two stand-alone

remittance advice messages were

published in April 2014. They allow for

remittance advice information to be

contained in the messages outside thepayment transaction information. The

defined flows allow for these standalone

messages to be exchanged outside of

the typical financial transaction process,

such as the buying or selling organiza-

tions exchanging the messages directly

or, alternatively, banks may provide

value-added services by sending the

remittance advice message to corpo-

rates. Two types of messages are avail-

able: The first carries the full remittanceinformation; the second carries how

or where information about the remit-

tance is delivered, such as a URL where

further information can be found on a

portal or that it has been sent by email,

fax or post, for example.

Customer demand and regulatory

pressure in the U.K. is also driving the

need for message sets associated with

the processing of real-time payments

and account switching (typically for

consumer bank customers). Following

completion of the pilot program, can-

didate message sets will be submitted

to ISO 20022 for approval before final

messages are published.

Functionality, such as account switch-

ing, has long been a problem for corpo-

rates and banks alike. The creation of

a message set may help a banks client

move to a new bank in a timely man-

ner, while maintaining existing banking

arrangements such as direct debits andtheir associated mandates, shows the

flexibility of ISO20022 in addressing

common payment-related problems. Ad-

ditionally, it offers further evidence that

the standard is capable of meeting the

many challenges that face the financial

services industry as well as corporates.

A third pilot is underway for a mes-

sage set for invoice tax reporting,

which was submitted by the Finnish

ISO 20022 user community. This groupwants greater harmonization of how

value added tax (VAT) information is

reported by corporates and banks to

various government agencies. Cur-

rently, reporting requirements for VAT

vary significantly, even within a single

country. The hope is that by standard-

izing the process considerable efficien-

cies can be achieved.

Future opportunities for ISO 20022

While the three pilots currently under-

way will ultimately expand the func-

tionality of ISO 20022 in very important

ways, there are many other challenges

faced by both banks and corporates

where ISO 20022 could play a crucial

role. For example, many companies may

benefit from a message set to support

Payee Positive Pay, both for check and

ACH. Payee Positive Pay is an anti-fraud

measure that sends data to a bank

when payments are issued. It helps toensure that payments can be validated

against details such as payee name,

amount and date. If there is a discrep-

ancy the company can decide not to

pay. While some banks have retro-engi-

neered solutions for Payee Positive Pay

using existing message sets, these are

not a clean fit and are sub-optimal.

Other opportunities for ISO 20022

include card transactions, which could

be included in payment transactionmessages and relevant details reported

for cash management activities. While

Currently, message development for specific business

needs are underway in the payments domain in four

important areas: remittance advice; real-time payments;

account switching; and invoice tax reporting.


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Newman said the impact of the new

regulations will become clear by the middle

of next year.

An increase in credit costs could poten-

tially discourage corporate treasurers from

negotiating as large a credit facility as pos-

sible, Webster said. Historically, a treasurer

who estimated that her company needed a $5

million operating line from a bank, but knew

the companys financial strength and credit

ratings were strong enough to qualify for $10

million, tended to ask for the larger facility.

The commitment fee on the entire facility was

minimal, and the company would pay interest

only on the part of the facility it drew down.

Now that banks will be required to count

the entire committed line toward reserve

requirements, treasurers should rethink that

approach, he said.

Were telling corporates, Take a look at

what you really need and be more reasonable

about what youre asking for, Webster said.

The banks dont want to tie up a lot of extra

funds that are never going to be used; theyre

going to be kicking up their fees on those.

But Wolff said that while the changes may

suggest its time for treasurers to reduce the size

of the credit line they request, the dynamic re-

mains that its fundamentally cheap insurance.

It would be the exception, not the norm,

that we see people reduce the size of facili-

ties, she said.

Dave Robertson, a partner at consultancy

Treasury Strategies, predicted that going for-

ward, banks will offer more of their custom-

ers advised, or uncommitted, lines of credit

rather than committed lines. With an advised

line, the bank is saying, If everything looks

good, well lend you this money, Robertson

said. Thats different from a committed line.

Those who dont want to pay for it arent go-

ing to get a committed line. Those who want

it are going to have to pay for it.

A Collateralized WorldMatthew Dunn, a director in the treasury

risk management practice at Deloitte, said

As banks prepare for stricter capital requirements that could

dampen their interest in extending credit, it behooves

corporate treasuries to get a better handle on their

relationships with their banks. Some treasuries are turning to risk-

adjusted return on capital, or RAROC, models to assess the returntheir banks are realizing on their business.

Weve helped our corporate clients develop their own RAROC

models, said Mark Webster, at partner at consultancy Treasury

Alliance Group. RAROC models measure the return on an investment

or business relationship while taking into account the amount of risk

involved.

Ten years ago, the companies that were at the leading edge of this

were just taking a look at revenue, Webster said. Now some of them

are beginning to move to using an actual RAROC model to say, What

are the banks getting from us?

When a company obtains a credit line from a group of banks, eachof the banks hopes to win cash management business or other work

from the company. When bankers visit corporate clients, they often

tell treasurers the bank isnt earning enough, and they ask for more

of the companys business, Webster said. This is where a companys

RAROC calculations come in handy.

What were finding as a best practice for corporate treasurers is to

track the relationship and be able to say to the banker, Gee, youre

one of five banks in our credit group and youre getting 25% of our

business, he said.

If the bank disagrees with the companys estimate, the company

can ask the bank for more information. Using RAROC calculationsgives treasuries a wonderful tool to have a discussion with the bank

and try to improve transparency, Webster said.

Its expensive for the corporate to move bank accounts, and its

expensive for banks to lose the relationship, he added. They want

to keep the relationship. The question is: How do they maximize it

for both sides?Laurens Tijdhof, a partner at European consulting company

Zanders Treasury & Finance Solutions, talks about wallet-adjusted

return on capital, or WAROC, a RAROC calculation that takes into

account the portion of the companys credit line that each bank

provides.

A WAROC calculation isnt an exact science, Tijdhof said,

because companies have to estimate some numbers. Its very

difficult to make an exact calculation like the bank does, he said.

But, he added, even based on these assumptions, you get quite

good insight on whether your bank makes money on you or not.

It really supports the decision-making for making the rightbalance between a corporate and a bank, he added.

A recent article by Tijdhof and a colleague, Pieter Sermeus, argued

that companies which use WAROC to assess their banks should

also take into account factors that cant be included in the WAROC

calculation, such as insights that a bank provides on the companys

business or specific services it offers that the company needs.

Tijdhof also pointed to the risk management aspect of monitoring,

given the likelihood the new capital requirements will cause banks to

be more selective about the companies to which they extend credit.

If a bank is losing money on a corporate client, they will probably

step out and withdraw the credit, he said. Its in the interest of thecorporate to make sure the relationship works for both.

Getting a Handle on Banking Relationships

(continued from page 3)



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that to some extent the impact of new capital

requirements will depend on the corporate

customers industry. For example, he said,

hedge funds that borrow short-term from

banks are likely to see prices rise because the

banks are going to have to hold high-quality

liquid assets against those loans.

Banks may also respond to the new capital

requirements by asking corporate customers

for collateral as part of more transactions, he

said.

We are going into what they refer to as

a collateralized world, Dunn said. If Im

going to do a transaction with you, I wantsome collateral in return. Its not only driven

by regulation, its driven by the risk manage-

ment issue.

Dunn cited the example of wire transfers

that banks execute for corporate customers.

If a bank looks at how many high-value pay-

ments it makes a day and runs some type of

stress scenario, it would be required to hold

some type of security against that, he said.

If it turns out the bank needs to hold a certain

number of Treasury bonds against thosepayments, holding Treasury bonds is going

to cost money, Dunn said. So the bank can

either ask clients for bonds as collateral or

add that to the cost.

Banks are dealing not only with the advent

of stricter reserve requirements, but also with

the growing cost of complying with an array

of new regulations.

The one thing that is really starting to

stretch banks is the regulatory compliance

costs, Dunn said. How do they pass thosecosts on to their clients? A lot of this regula-

tion hasnt become effective yet. Over the next

three years, as that cost starts bleeding to

the bottom line, how do they recoup that or

charge their client base more money?

Webster said compliance costs give banks

a reason to value larger corporate customers

more than smaller ones. Lets say Ive got

a relationship with Company A thats worth

$100,000 in business a year and a relationship

with Company B thats worth $10,000 a year,

he said. My regulatory costs as a bank to deal

with A and B are going to be roughly the same.

Id much rather get $100,000 than $10,000.

Banks are looking toward moving tolarger relationships, he added. And in some

cases theyre going to Company B and saying,

Were going to shut down this relationship;

were not making enough money.

Webster argued, though, that the new

capital requirements favored treatment for

operational cash could end up forging tighter

relationships between banks and corporate

treasury functions because banks will need

to make sure they are familiar enough with a

companys business and cash flows to backup their classification of company deposits

as operational cash. The relationship need

goes up even more, Webster said.

Craig Jeffery, managing partner at consul-

tancy Strategic Treasurer in Atlanta, said that

while the financial crisis put banks in the

drivers seat, the balance of power has since

shifted back toward corporates.

When the financial crisis hit, it went very

rapidly from a buyers market to a sellers

market, he said. The power was all on the

bankers side.

Over the years, its moved back toward a

buyers market again, Jeffery continued. Its

not as thinly priced as it was pre-financial

crisis, but the pendulum has swung heavily

and consistently onto the buyers side. There

has been a lot more capital that needs to be

deployed, and a lot of companies tend to be

cash-rich.

Blaise Scioli, director of treasury services

at e5 Solutions Group, which works with

companies on implementing SAP financial

and treasury applications, predicted that an

increase in the cost of bank credit will en-

courage companies to broaden their sourcesof funding.

Facilities are going to become more ex-

pensive, even short-term facilities, he said.

And theres going to be a move away from

them, especially among corporates who have

the ability to, say, issue commercial paper.

Safety in Numbers?Prior to the financial crisis, many corporate

treasurers focused on consolidating the

number of banks with which they did busi-ness, hoping to cut costs and become more

treasuryandrisk.com SEPTEMBER 2014 SPECIAL REPORT TREASURY & RISK7

Any facility that represents a liquidity

backstop to some other type of vehicle thatcould potentially be shut off in time of crisis

will be more impacted than facilities for

more operational or term-out purposes.

DUB NEWMAN, BANK OF AMERICA MERRILL LYNCH

Where [treasuries are] drawing the line

as far as the number of banks is probably

higher than what they would have

targeted five or 10 years ago, when they

wanted to get down to one global bank.

JAIME RYAN, E5 SOLUTIONS GROUP


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treasuryandrisk.com

efficient. But the crisis called that trend into

question as it underscored the possibility of

bank failures.

Before the credit crisis, people put more

eggs into one basket, said Jaime Ryan,

co-founder and managing principal at e5

Solutions Group. Now they want to be able

to diversify their risk.

As a result, Ryan said, where theyre

drawing the line as far as the number of

banks is probably higher than what they

would have targeted five or 10 years ago,

when they wanted to get down to one global

bank. Treasury teams that did get down

to one global bank, theyre the ones that are

opening up to more relationships, he added.

But others said that companies push to

consolidate banking relationships is still

going strong.

Bank of Americas Newman noted that

many corporate treasuries have made prog-

ress in consolidating their ERP and back-of-

fice systems. That enables them to work with

fewer banks, he said. They also understand

every incremental bank and every incremen-tal account costs them money from an over-

sight perspective, and they are very focused

on reducing the number of bank accounts

and ultimately the number of banks.

Newman added that while there are still afair number of corporate acquisitions, trea-

sury departments never increase.

They may buy significant assets, but the

number of people in treasury is flat to down,

he said. The way they do that is by the

ability to manage information and data, and

the way to do that is decrease the number of

banks and accounts.

Strategic Treasurers Jeffery cited a long

trend of people rationalizing and consolidat-

ing their banking relationships. But he alsonoted a number of factors pushing corporate

treasuries in the opposite direction.

Companies add banks because they

acquire somebody who has banking relation-

ships, or they have a large need for capital or

they have a need for additional capabilities,

particularly globally, Jeffery said. Or theyre

looking for diversification to help reduce

counterparty exposure.

In the end, the factors that lead treasur-

ies to add banks or eliminate some of their

banking relationships may offset one another.

Jeffery said that over the years, Strategic Trea-

surer surveys show the number of relation-

ships stays relatively consistent.

Counterparty Credit Riska Concern

The financial crisis also produced a greater

interest among corporate treasuries in track-

ing the credit risk posed by counterparties,

including the companys banks.

Weve definitely seen that get added to

almost every client implementation, Ryan

said, adding that he is also seeing previous

clients that didnt initially implement creditrisk management systems coming back to add

that capability to their treasury systems.

Calculating the counterparty credit risk

posed by a companys banks can require

some work, since a company may well havemultiple exposures to a single bank, ranging

from a credit facility and bank accounts to

derivativesused to hedge risks, supply chain

financingarrangements, or holdings of a

banks commercial paper in the money funds

the company invests in.

Credit ratings are a traditional measure for

gauging credit risk, but counterparty credit

risk monitoringcan also look at a banks

credit default swaps, the prices of its stock or

bonds, and the information in its quarterlyfinancials.

Weve been seeing the trend moving more and more

toward centralized bank communications.

JAIME RYAN, E5 SOLUTIONS GROUP

HarmonizingBankMessages

Using a common conduit likeSWIFT

to communicate with bankscan

help treasuries eliminate a lot of the

expense and IT effort involved in linking to

each bank separately. The banking industry

has been moving toward even greater effi-

ciency by implementing ISO 20022, an XML

messaging standard, for the various kinds

of communications that flow between banks

and their corporate customers.

Were seeing more and more banks

offering these types of standard ISO mes-

sages, said Jaime Ryan, co-founder and

managing principal of e5 Solutions Group,

adding that standardized messages defi-

nitely help with the automated integration

with the banks.

But standardized messaging formats are

only half the battle, since there can still be

differences in the content within messages

from bank to bank. Now banks, vendors,

and corporates are working to harmonize

content.

One content issue involves the types ofcodes that can populate certain fields, said

Blaise Scioli, director of treasury services at

e5. Sometimes not all banks accept all the

different types, he said. Harmonization

takes fields like that and says, Well use

these four, but only these four.

Harmonization also sets up rules for

repeating, he said, such as allowing com-

panies to define multiple signers for an

account, and it looks at how to deal with

free-form information.SWIFT organized Common Global Imple-

mentation (CGI) groups to focus on different

standards. The Global Rapid eBAM Adoption

Team has been working on electronic bank

account management (eBAM) messages, and

its harmonization proposals for eBAM mes-

sages are currently open for comment.

More recently, CGI set up a task force

to consider whether it should make an ef-

fort to harmonize CAMT cash management

messages. The question is, to what extentis this practical, would there be a ground-

swell of support for it, Scioli said. We

spent a lot of time on the task force talking

about scope.
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Treasuries implementing credit risk

management systems are usually pulling in

streams of market data from providers like

Bloomberg and Reuters to use in calculating

counterparty credit risk, Ryan added.

Webster said that while theres still an

assumption that certain banks are too big to

fail, company executives realize that if they

have a single bank, and that bank ends up

being forced to merge as a result of financial

problems, they could face operational dif-

ficulties. Even a company with two banks that

saw one of those banks fail and merge with

the other could run into problems, he said.

From an operational point of view, I want to

originate wires from more than one bank so

that if something happens to Bank As wire

room, I also have Bank B.

The deterioration in banks credit ratings

since the financial crisis suggests companies

should be monitoring their bank counterpar-

ties more closely, said Jeffery. But a survey

conducted earlier this year by Strategic Trea-

surer and Bottomline Technologies showed

that just 36% of companies formally monitorthe credit risk posed by their banks.

The vast majority of organizations dont

seem to be able to adequately analyze their

exposures at the level or frequency they think

they should, Jeffery said. They need more

of a risk framework and then they also need

technology and data.

About 20% of the companies surveyed said

their most urgent issue was aggregating the

data, he noted, while another 20% cited the

need for knowledge, transparency, and vis-ibility as most crucial in terms counterparty

credit risk monitoring.

Down to One Pipe

At the same time that new regulations are

altering the environment for obtaining credit,

SWIFT has simplified the technology a com-

pany uses to connect with its banks.

SWIFT, which provides secure messaging

for banks around the world, began making

its services available to corporates in 2006. In2008, it introduced Alliance Lite, a web-based

version that targeted smaller companies. Most

recently, SWIFT has started teaming up with

software providers, including some treasury

management system (TMS) vendors, to build

its connectivity into cloud-based products.

Meanwhile, ERP provider SAP is rolling out a

Financial Services Network (FSN), which uses

the cloud to link companies to their banks.

Weve been seeing the trend moving more

and more toward centralized bank communi-

cations, said e5s Ryan, adding that SWIFTs

offerings aimed at smaller companies mean

that SWIFT connectivity is no longer limited

to the biggest companies.

It certainly streamlines the process whenyou can work with one entity like SWIFT or

SAPs FSN to do your connections to the bank

and then be able to streamline with single

formats, Ryan added. He noted, though, that

content is still not harmonized.

Once a company communicates with its

banks through a network like SWIFT, setting

up a connection with a new bank becomes

easier, he said. In todays world, with risk

mitigation, the desire is plug and play.

If a company wants to change banks now,the level of effort involved in doing that is

so much smaller than it would have been 20

years ago, [given] common connectivity, com-

mon standards, said e5s Scioli. But I feel

the corporates are still largely constrained

by things like credit relationships, the ability

to borrow when they need to, geographic

considerations. I dont think weve seen that

sea change occur yet.

Theres no question corporates are

increasing their use of SWIFT, said Bank ofAmericas Newman. Its on a double-digit

basis. He cited the secure communica-

tion that SWIFT provides for corporates

and noted that interfacing with their banks

using just one protocol reduces companies

technology costs.

Treasury Alliance Groups Webster said

SWIFT is a great tool for companies that have

four or five banks and operate in various

parts of the world, because it allows them to

get daily balances and transaction informa-

tion at the same time it lowers the cost of

communicating with their banks.

But while SWIFT makes it easier for

a company to bring on a new bank, the

company still has to establish a relationshipwith a bank before making the move, he said.

Webster doesnt see SWIFT causing corpo-

rates to switch banks more frequently. In fact,

he argues, the tighter communication that

SWIFT is facilitating between banks and their

corporate customers is making the relation-

ships stickier.

Im getting daily balance reporting, and

its becoming best practice to look at all

transactions on a daily basis and reconcile

all my accounts on a daily basis, Webstersaid. If the company decides to switch banks,

Ive got to test all that; all my processes and

procedures have to change. If theres not a

reason to do it, Im going to avoid it.

Newman also argued that the adoption of

SWIFT wasnt encouraging companies to

change banks. I think its facilitating a lot of

great things for clients, but we have not seen

switching as something thats resulted from

the adoption of SWIFT, he said. Theres so

much more to a bank relationship thansimply the messaging part of it.

We are going into what they refer

to as a collateralized world. If Im

going to do a transaction with you,

I want some collateral in return.

MATTHEW DUNN, DELOITTE
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10/16

Health CheckHow to perform a health check on your banking

relationships to ensure they are working effectively for youBy Blaise Scioli, Director of Treasury Services, e5 Solutions Group

SPONSORED STATEMENT

Its a fact. Corporate treasuries

are under enormous pressure

to more effectively manage

liquidity and credit, reduce

borrowing costs, shorten the cash

conversion cycle and manage

financial risk all while dealing

with increasingly volatile financial

markets, globalization and a

frenzy of regulatory changes.

In this crucible, increased

importance is placed on manag-

ing banking relationships; at the

same time, the ability to quickly

change providers has become vital.

The first trend requires more touch-

es, better visibility and improved

data. The second demands increasedstandardization and automation of

routine processes. Getting the best

terms and services seems to require

effort in both areas at the same time.

RAISING THE BARBank relationship management begins

with bank selection, which forms the

foundation of all follow-on manage-

ment activities. Most companies requirecertain characteristics and capabili-

ties from their banking partners.

Transaction support

First and foremost, the selection

analysis has to identify banks that

can provide the package of services

the company requires. It is not suf-

ficient that a bank lists the required

service in marketing information. The

analysis must identify banks capableof providing a robust cross-section

of the required services, which pass

muster when analyzed in detail:

Can the bank provide complementary

services that address fundamental

requirements? For example, if youare seeking a bank for trade services,

can the bank support your short-term

borrowing and investing needs, while

also providing the commercial paper

issuance services you require? You

need to define these packages

of requirements, not the banks.

For global and multinational compa-

nies, geography is critical. Can the

bank support your current business,

as well as the geographic expansionyou envision over the next five years,

considering organic growth, M&A

activity and the like? Is the banks

footprint consistent with your collec-

tions and payments requirements?

Consider also the manner in which

potential providers address geographi-

cal coverage. Is it native within the

bank, or accomplished through other

relationships? If native, does the banktruly operate as one entity, or do

regional differences make it more like

working with multiple banks?

Technology is equally critical.

While many companies consider

bank technology to be a second-

ary characteristic, our experience

integrating treasury business

processes compels us to list

this as a ticket to the dance.

Operational efficiency in-

creasingly depends on technol-

ogy. Even a bank that features

leading technology internally

may have inflexible solutions

that cant integrate with cus-

tomer environments. Bank technol-

ogy plays a critical role in transaction

processing and information reporting

within the corporate customers ERPenvironment. Additionally, technol-

ogy impacts service quality we

have all experienced the frustration of

disjointed, disparate reporting. From

a technology perspective, consider:

Is the necessary technology avail-

able to your organization?

Are the tools, information prod-

ucts, protocols and formats

that you require available?

Does the provider have a trackrecord of investing in technology

and keeping offerings current?

Is the banks technology position-

ing consistent with yours? Does it

operate on the leading edge, or is it

more a second-wave implementer?

Is the bank appropriately active in

standards bodies, industry groups,

etc.? Does it rapidly embed new

standards in product offerings?

Is support for products based onolder standards continued for an

appropriate length of time?


11/16


12/16


Earnings credit rate products

broaden out; callable CDs are coming.

BY SUSAN KELLY

Basel IIIs liquidity coverage ratio consid-

ers banks ability to hold onto deposits for

a period of 30 days in times of stress and

requires banks to hold more capital against

deposits deemed likely to be withdrawn. One

way to qualify deposits for lighter reserve

requirements is to show that the deposits are

linked to the corporate customers opera-

tions, such as accounts used to make payrollor handle accounts payable.

Those deposits that dont qualify as

operating deposits will have very low value,

said Dave Robertson, a partner at consultancy

Treasury Strategies. The nice thing about

earnings credit is it clearly ties the balance to

the services.

Earnings credit rate (ECR) products give

corporates implied interest on deposits that

they can use to offset cash management fees.

Despite forecasts that the discontinua-tion of unlimited Federal Deposit Insurance

Corp. coverage for bank deposits at the end

of 2012 would send a lot of corporate money

elsewhere, companies continue to keep a

large portion of their short-term cash in

bank deposits. The Association for Financial

Professionals 2014 Liquidity Surveyshowed

companies had 52% of their short-term

portfolios in bank deposits, up from 50% in

2013. And three-quarters of the more than

700 finance executives surveyed said their

companies realized earnings credit rates ontheir bank deposits.

As the new capital requirements get closer,

banks are making ECR products more attrac-

tive by broadening the time frame and the

fees that ECR can be used to offset.

ECR products usually work on a monthly

use-it-or-lose-it basis; a months implied

interest can be applied against that months

fees, and any implied interest thats not used

in that month goes away.

According to the AFP survey, some banks

now calculate ECR on a quarterly, insteadof a monthly, basis, and some are allowing

ECR is king, and non-ECR balances aregoing to have to be put into restructured

deposit products as part of Basel III.

DAVE ROBERTSON, TREASURY STRATEGIES

Banks Tweak Productswith Basel III in Mind

B

anks are preparing for the new capital requirements that will start to take effect

in the United States at the start of next year by making improvements in their

earnings credit rate products, and additional changes in banks cash managementproducts are expected down the road.
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13/16


companies to use ECR to pay not only cash

management fees, but other bank charges,

such as custody or escrow fees.

We see that banks have stepped up and

recognized that this is a major driver for deci-

sion making, and theyve responded accord-

ingly, either by offering termed-out earnings

credit or theyve allowed non-traditional uses

of earnings credit, said Tom Hunt, director

of treasury services at AFP.

Robertson said the more exciting change

is the expansion of ECR programs outside the

United States.

We are seeing the largest banks allowing

companies to use ECR on U.S. dollar balances

around the world, he said. So a client with

offshore U.S. dollars in Hong Kong, they can

offset Asian bank expenses. Its a toe in the

water of extending ECR outside the U.S.

The second phase would be a non-U.S.

regional bank saying, Im going to roll out an

earnings credit product, Robertson added,but said he hadnt yet seen that. ECR has

traditionally been a U.S. product because

banks in other countries didnt face Reg Qs

prohibition on paying interest on business

accounts.

ECR products are a win-win for both

banks and their corporate customers, Robert-

son said. In todays environment, balances

arent really worth much to a corporate

treasurer because rates are so low, but theyre

worth a lot to banks banks value them.A corporate might get an ECR of 12 basis

points or 20 basis points, which is well above

what they could do at the margin overnight

anywhere else, he said. And the bank gets

stable balances that are very attractive to it.

While the level of interest banks pay on ECR

deposits is higher than what they pay in the

overnight market, banks prefer to pay ECR

on companies deposits because its more

stable and its more valuable from a liquidity

perspective, Robertson said.ECR is king, and non-ECR balances are go-

ing to have to be put into restructured deposit

products as part of Basel III, he added.

Many banks are currently working to de-

velop products that align with the new capital

requirements, Robertson said. He noted that

in addition to operating balances, ECR values

deposits that are guaranteed not to leave for

30 days.

Banks currently offer short-term certifi-

cates of deposit (CDs), but Robertson noted

that for purposes of the liquidity coverage

ratio, a 45-day CD would offer value over the

first 14, 15 days, he said. After that, it would

be a non-stable source of funding.

So banks are looking at callable CDs that

would require customers to give the bank 31

days notice before withdrawing the money,

he said. Its perpetually a stable source of

funding.

One bank is piloting such a product, he

said. And I would say of our bank client

base, probably 20% are doing some sort of

development work to roll them out and an-

other 40% are doing more conceptual designaround these solutions.

Robertson predicted banks would start roll-

ing out the products this fall or next spring.

Its just a matter of how quickly they can

bring them to market.

In the long run, youre going to see prod-

ucts like [money market deposit accounts]

have a very low rate because they really are

not attractive funding for a bank, and things

like 30-day CDs become really unattractive,

he said. Banks will only offer those as anaccommodation to their clients. These call-

able CDs will have an attractive rate because

they allow the banks to offset loans and other

longer-term assets.

Peter Gilchrist, a managing director at

consultancy Novantas, predicted banks will

ramp up their efforts around ECR as interest

rates head higher and make other short-term

products more attractive places for treasuries

to invest corporate cash.

As you start to see rates rise, youll see

banks become more competitive on the ECR

front, he said.

Gilchrist also expects that banks will even-

tually promote interest-bearing business ac-

counts, a product made possible by the repeal

of Reg Q in 2011. And paying interest means

the money in the account is more likely to be

classified as operational funds for the purpose

of calculating reserve requirements, he said.

Interest-bearing business accounts havent

yet taken off, he said.

Theres a set of believers that say its

going to happen, as there will be more value

placed on deposits and [banks] will be will-ing to pay interest on them, Gilchrist said.

The naysayers are saying in an environment

where so much of a banks profitability is

under attack from regulatory and compliance

burdens and were looking at profit numbers

that are quite depressed, banks will hesitate

as much as possible to offer new products.

I think youve got banks in both camps,

but larger institutions have those interest-rate

accounts on the shelf, ready to roll out, he

said. Its just a prisoners dilemma of waitingto see who moves first.

As you start to see rates rise,youll see banks become more

competitive on the ECR front.

PETER GILCHRIST, NOVANTAS


14/16

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