Liquidity Management in the New Era
Regulatory Update
Jeff Avers
Director, Corporate Liquidity Specialist
April 2015
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Regulatory Reform: “Strengthened but not Simplified”
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Higher bank interest expense on deposits
Reduced Revenue Streams
Volcker Rule
Potential divestitures
Reduced Fee Income
NSF/Overdrafts (Regulation E)
Debit Interchange (Durbin Amendment)
Increased Balance Sheet Costs
Basel III Capital Ratios
Basel III Liquidity Coverage Ratio
Increased Fees
Uncollateralized daylight overdrafts
FDIC
2a-7 Money Fund Reform
• 2010 Changes
• 2016 Changes
Development costs for new products Employee training
Reduced value of deposits
Reg Q repeal
Basel III - Higher liquidity levels needed to
support the commercial business
Increased cost of compliance & oversight
Human, Systems, tracking and reporting
Increased emphasis on minimizing marginally
profitable and unprofitable relationships
Discontinuation of “Free Checking”
Collateralized Deposits
Syndicated Credit Facilities
Increased Bank Expenses Increased Customer Expenses
Regulatory Reform – A Sampling
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Banks: 2008 – 2012
Fed Funds Target lowered from 4.25% 1Q 2008 to 0-.25% 4Q 2008
Unlimited FDIC Insurance: late 2008 through December 2012
FDIC Coverage raised from $100K to 200K per depositor
Regulation Q Repealed
Money Funds: Implemented 2010
Max Weighted Average Maturity reduced from 90 to 60 days
30% of portfolio must mature within one week and 10% must mature overnight
Max of 2nd tier securities reduced from 5% to 3%
2nd tier issuer limit reduced from 1% to 1/2%
Max maturity of 2nd tier securities reduced from 397 to 45 days
Key Regulatory Changes Impacting Liquidity Management
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Corporate Cash Has Been Increasing
Grew from $500 Billion in
1988 to more than $2.2
Trillion at the end of 2013
Checkable deposits as a
percent of Corporate Cash
have increased steadily
since 2008 • Relative Value of ECR
• Unlimited FDIC through
12/31/2012
• Declined from 25% in 1988
to 1.9% in 2008 , before
growing to 20% in 2013
Trends In Corporate Cash
Source: Federal Reserve Bank
Source: Federal Reserve Bank
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Liquidity Solutions (Market Benchmarks)
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MARKET RATES FOR CASH INVESTMENT INSTRUMENTS
Market Benchmarks 2015-03 2015-02 2015-01 2014-122014
High
2014
Low
2014
Average
3 year
Average
5 Year
Average
Fed Funds Effective Rate1 FFE 11 bps 11 bps 11 bps 11 bps 13 bps 6 bps 8 bps 10 bps 12 bps
30-Day Nonfinancial Commercial Paper1 CP 8 bps 8 bps 9 bps 11 bps 17 bps 3 bps 7 bps 9 bps 11 bps
30-Day Financial Commercial Paper1 CP 9 bps 10 bps 12 bps 11 bps 13 bps 4 bps 8 bps 9 bps 12 bps
Repurchase Agreements2 Repo 19 bps 13 bps 13 bps 18 bps 25 bps 2 bps 9 bps 13 bps 14 bps
1 Month U.S. Treasury1 UST 2 bps 2 bps 2 bps 3 bps 7 bps 1 bps 3 bps 5 bps 6 bps
1 Month Eurodollar Deposit Rate1 Euro$ 19 bps 19 bps 19 bps 18 bps 20 bps 17 bps 18 bps 22 bps 27 bps
1 Month LIBOR3 1M LIBOR 18 bps 17 bps 17 bps 16 bps 17 bps 15 bps 16 bps 18 bps 21 bps
3 Month LIBOR4 3M LIBOR 27 bps 26 bps 25 bps 24 bps 26 bps 22 bps 23 bps 28 bps 32 bps
Crane Treasury Institutional MF Index5 MMF 1 bps 1 bps 1 bps 1 bps 1 bps 1 bps 1 bps 1 bps 1 bps
Crane AAA Prime Institutional MF Index5 MMF 4 bps 3 bps 3 bps 3 bps 3 bps 2 bps 3 bps 6 bps 7 bps
5 Source: Crane Data. 7-Day Yield
1 Source: http://www.federalreserve.gov/releases/h15/data.htm2 Source: http://www.dtcc.com/charts/dtcc-gcf-repo-index.aspx3 Source: http://research.stlouisfed.org/fred2/series/USD1MTD156N4 Source: http://research.stlouisfed.org/fred2/series/USD3MTD156N
Rates continue to be at or near historic lows
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Deposits Share of Corporate Cash Has Grown Significantly
Have Replaced MMF Investment Allocations May Return to
Pre-2008 Levels
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Cash investors have been increasing their allocation to bank deposits over the last seven years,
while simultaneously decreasing their allocation to money market mutual funds
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New & Proposed Regulatory Changes Impacting Liquidity Mgt
Basel III LCR
2a-7 Reform
Reg Q Repeal
Fed Policy
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Subject to Full LCR Subject to Partial LCR Not Subject to LCR
U.S. Bank Holding
Companies with ≥ $250
billion in total
consolidated assets
U.S. depository
institution holding
companies with ≥ $50
billion in total
consolidated assets
U.S. bank holding
companies (BHC) or
Savings & Loan Holding
Companies (SLHC ) with
< $50 billion in total
consolidated assets
*Includes the top 9 US
Banks ranked by assets as
of 12/31/2014
*Includes the 10th through
33rd largest US. banks
ranked by assets as of
12/31/2014
*Includes the remaining
U.S. banks and bank
holding companies
* Source: SNL Financial Rankings as of December 31, 2014
Basel III Liquidity Coverage Ratio
The LCR requires a banking organization’s stock of unencumbered high-quality liquid
assets (HQLAs) to be at least 100% of its total net cash outflows over a 30-day
standardized supervisory liquidity stress scenario
Per the Securities and Exchange Commission:
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Parent Company Assets ($B) As of 12/31/2014
Ass
ets
≥ $
25
0 b
illio
n 1 JPMorgan Chase 2,416
2 Bank of America 2,102
3 Citigroup 1,881
4 Wells Fargo 1,527
5 Bank of New York Mellon 374
6 U.S. Bancorp 364
7 PNC Financial 320
8 Capital One 297
9 HSBC North America 290
Assets
≥ $
50 b
illio
n 10 State Street 243
11 TD Bank US 235
12 BB&T 182
13 SunTrust 175
14 American Express 153
15 Ally Financial 151
16 Charles Schwab 144
17 Fifth Third 130
Parent Company Assets ($B) As of 12/31/2014
Assets
≥ $
50 b
illio
n
18 M&T 124
19 USAA 122
20 RBS Citizens 122
21 Regions Financial 117
22 BMO Financial 111
23 UnionBanCal 106
24 Northern Trust 103
25 KeyCorp 93
26 BancWest 84
27 Discover Financial 79
28 Santander USA 77
29 BBVA Compass 72
30 Deutsche Bank Trust 67
31 Comerica 65
32 Huntington
Bancshares
59
33 Zions BanCorp 56
Basel III Banks
Source: SNL Financial Rankings as of December 31, 2014
11 PwC
Deposit Runoff Factors
Basel III Liquidity Coverage Ratio: Deposit Behavioral Issues
Stock of Highly
Liquid Assets
Stable
Deposits
(3 -5% Runoff)
Less Stable
Deposits
(10% Runoff)
Wholesale
Operational
(25% Runoff)
Other
Wholesale
Non-Financial
(40% Runoff)
Other
Wholesale
Financial
(100% Runoff)
Under the LCR standard, each
dollar of assumed runoff
requires an offsetting dollar
of liquid asset buffer. Runoff
assumptions will therefore
have a significant impact on
deposit profitability.
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Retail/Consumer
and
Small Business
Wholesale
Basel III Liquidity Coverage Ratio
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Credit Risk: Depositors have a preferred claim
DIC National Depositor Preference Rule
Order of Settling Claims in the Event of a Bank Failure
1 Administrative Expenses of the Receiver
2 Any Deposit Liability of the Institution • Insured Deposits are settled first, followed by uninsured deposits
• Eurodollar and other offshore deposits are considered a general creditor
obligation
3 Any Subordinated Obligations
4 Any Other General or Senior Liabilities of the Institution
• This includes offshore deposits
5 Any Obligation of Commonly Controlled Depository Institutions for Cross-
Guaranty Assessments Under 12 U.S.C. §1815(e)(2)(C)
6 Any Obligations to Shareholders or Members (including Holding
Companies and their Creditors
Source: Federal Deposit Insurance Corporation
FDIC National Depositor Preference Rule
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Credit Risk: Depositors have a preferred claim
DIC National Depositor Preference Rule
Announced by Moody’s on March 17, 2015
Previous
Approach
• Each bank is assigned a single overall long-term rating
• Deposits and other forms of unsecured long-term debt are
considered as part of the bank’s long-term debt structure
New Approach • The bank is not assigned an overall rating
• Individual classes of long-term debt are each assigned their
own rating
• Deposits are given their own unique rating
• Long-term unsecured debt is given it own unique rating
Net Effect Deposits will likely be rated higher than a bank’s unsecured
debt in recognition of the depositor’s preferential claim over
that of general creditors
Source: Moody’s Investors Service
Changes to Moody’s Bank Rating Methodology
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2014 SEC 2a-7 Money Fund Reform
October 2016 Implementation
Net Asset Value
Prime and municipal funds convert to “floating NAV”
- NAV to be calculated to 4 decimal places ($ 1.0000)
Treasury and government funds remain stable NAV
Liquidity Fee
Weekly liquid assets < 30% ► Fund Board may impose a 2% redemption fee
Weekly liquid assets < 10% ► 1% redemption fee
- Fund Board can determine otherwise
Redemption Gate
Weekly liquid assets < 30% ► Fund Board may suspend redemptions for up to 10
days
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Potential Impact of a Limit on or Charging of Fees for Full
Redemption of MMF Holdings on Organization's Willingness to
Invest in MMF’s
Money Fund Reform: 2013 AFP Liquidity Survey
55%+
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Potential Impact of a Floating NAV on Organizations’
Willingness to Invest in MMFs
Money Fund Reform: 2013 AFP Liquidity Survey
65%
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When Interest Rates Rise, The Repeal of Reg Q1 plus Money Fund Reform
Could Drive Corporate Cash Balances onto Bank Balance Sheets…
Provided the Banks Want the Liquidity
Percent of Total Corporate Liquidity Held in Bank Deposits*
This is a positive outcome
for U.S. banks only if loan
demand and deposit growth
are in synch
*Source: 2010 AFP Liquidity Survey and Treasury Strategies’ Global Liquidity Research
¹ Repealed in 2011, Regulation Q was a 1930s Depression Era regulation that disallowed banks from paying interest on commercial checking accounts
¹
0%
20%
40%
60%
80%
USReg Q
FrancePost-Reg
Q
UKNo Reg Q
In countries allowed to pay interest on checking, corporates maintain 60-70% of
their liquidity in the banking system
Impact of Reg Q Repeal
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Post Reg Q Repeal, the Primary Purpose of Sweep Has Changed
Primary Purpose of Sweep
Old Paradigm Post-Reg Q
Obtain yield on idle cash balances Diversify away from bank risk
Obtain yield in excess of interest-bearing DDA
Predominant Sweep Vehicles
Money Funds
Eurodollar Deposits
Repo
Bank Parent Commercial Paper
Repo (eliminate credit risk)
Money Funds (diversify away from bank risk)
Bank Parent CP (yield enhancement)
Alternative ‘off balance sheet’ products
The Impact of Reg Q Repeal: The Future of Sweep
Source: Treasury Strategies’ proprietary research; Commercial
Deposit/Sweep Study & Global Corporate Liquidity Research
$-
$100
$200
$300
$400
$500
$600
$700
$800
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD
Total U.S. Sweep Balances ($B)
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Will Deposit Investment Allocations Return to Pre-2008 Levels
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Cash investors have been increasing their allocation to bank deposits over the last seven
years, while simultaneously decreasing their allocation to money market mutual funds
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Source: 2013 AFP Liquidity Survey
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Will Deposit Investment Allocations Return to Pre-2008 Levels
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57%
49%
33%
13%
Yield in Alternative Options
CAPEX/Acquisitions Credit Exposure MMF Reform
Factors Affecting Cash Held in Bank Deposits
Source: 2013 AFP Liquidity Survey
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Summary of Today’s Discussion
SunTrust Bank, Member FDIC. SunTrust is a federally registered service mark of SunTrust Banks, Inc. 04/13
Basel III LCR
2a-7 Reform
Reg Q Repeal
Fed Policy
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