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BASEL III A NEW PHASE OF LIQUIDITY MANAGEMENT FOR FINANCIAL INSTITUTIONS? 23 February 2015 Kevin Wong, Director Client Insights & Solutions International.

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Presentation on theme: "BASEL III A NEW PHASE OF LIQUIDITY MANAGEMENT FOR FINANCIAL INSTITUTIONS? 23 February 2015 Kevin Wong, Director Client Insights & Solutions International."— Presentation transcript:

1 BASEL III A NEW PHASE OF LIQUIDITY MANAGEMENT FOR FINANCIAL INSTITUTIONS? 23 February 2015 Kevin Wong, Director Client Insights & Solutions International & Institutional Banking

2 2 Background: the Basel III response to the GFC >Basel III is a complex, multi-faceted, multi-staged set of banking regulatory reforms >Global ‘base’ rules, but national differences >Milestones  1 Jan 2013: Capital – quantity and quality  1 Jan 2015: Liquidity Coverage Ratio (LCR) – short term liquidity ‒ 1 Jan 2018: Net Stable Funding Ratio (NSFR) – longer term liquidity/’match funding’ ‒ 1 Jan 2018: Leverage Ratio – on- and off-balance sheet leverage >Direct impact on banks; indirect impact on bank customers, counterparties and investors In the view of banking regulators, the GFC exposed several key weaknesses in the global banking industry – capital, liquidity and leverage

3 3 Liquidity Coverage Ratio (LCR) >Stress scenario is for a 30 day period >HQLA comprises essentially cash, RBA reserves and govt/semi-govt bonds in Australia ‒ High quality but low yields >Net cash outflows represent highly prescriptive ‘run off’ assumptions across different funding liabilities of a bank >Framework applies to larger/more sophisticated banks/ADIs, but the practical scope seems broader The new LCR framework took effect from 1 Jan 2015. The objective is to ensure that banks have sufficient, high quality liquid assets in an acute short-term liquidity stress scenario High Quality Liquid Assets (HQLA) Net cash outflows (30 days) ≥ 100%

4 4 Run-off assumptions - retail vs. wholesale funding In the eyes of banking regulators, retail deposits are ‘stickiest’ while wholesale financial institution deposits are considered the least ‘sticky’ >To illustrate – deposits with effective maturity of ≤30 days: >In other words, a bank has to hold: ‒ $0.05-0.10 in cash/RBA reserves/govt bonds for a $1.00 Retail deposit vs. ‒ $0.40 in HQLA for a $1.00 wholesale non-FI deposit vs. ‒ $1.00 in HQLA for a $1.00 wholesale FI deposit DEPOSITOR TYPE RUN OFF PRESCRIBEDCOMMENT RETAIL, SME TYPICALLY 5-10% >Higher value deposits/on-line accounts/lack of customer relationship may lead to 25% run-off prescribed WHOLESALE - OPERATIONAL 25%>Proven clearing, custody or cash management relationship WHOLESALE – NON-FI40%>Considered ‘stickier’ than FIs WHOLESALE – FI100%>Note APRA’s broad definition of “Financial Institutions” 4-8x 2.5x

5 5 1 year+ So what are banks’ preferences under LCR? >Term deposits of at least 31 days BUT: ‒ Evergreen/rolling is better ‒ Notice period is better ‒ Longer term is better >12 months+ is also a consideration as banks consider future regulatory reform on term/match funding >6 months+ may provide additional bank benefit from a regulatory perspective vs <6 months? ‒ Watch this space… It’s worth thinking about this from a time perspective… 31 days – up to 364 days 0-30 days … and from a client category perspective Retail/SME Wholesale Operational – FI and non-FI Wholesale – non-FI Wholesale – FI >Banks are becoming more granular in viewing and differentiating client deposits ‒ Segment prioritisation ‒ Rates offered 

6 6 The decision tree on FI deposits What is a “Financial Institution”? “… includes any institution engaged substantively in one or more of the following activities – banking; leasing; issuing credit cards; portfolio management (including asset management and funds management); management of securitisation schemes; equity and/or debt securities, futures and commodity trading and broking; custodial and safekeeping services; insurance (both general and life) and similar activities that are ancillary to the conduct of these activities. A financial institution includes any authorised NOHC or overseas equivalent” “For the avoidance of doubt, this definition includes money market corporations, finance companies, friendly societies and the trustees of superannuation/pension funds, public unit trusts/mutual funds and cash management trusts” Are withdrawal /deposit decisions made by the underlying retail customer? 100% Run-Off [25%] Run-Off 25% Run-Off Is deposit from a Financial Institution (FI)? YES NO Only that portion of the deposit proven to serve operational needs can qualify as stable Is deposit on a transactional platform and required for company operations? Retail ‘look-through’ treatment – FI intermediary has no obligation/ability to act without retail clients’ instructions YES NO Is remaining tenor ≤30 days? YES 0% Run-Off NO YES

7 7 Intermediated deposits >Extract re “intermediated deposits” from APRA banking prudential standard APS 210 – Liquidity: Subject to strict criteria, APRA will recognise certain retail deposits on wholesale intermediary platforms as “retail” for purposes of the Basel III LCR framework

8 8 A new phase of liquidity management? Both clients’ and banks’ objectives can be better aligned with the appropriate cash management solutions Funding liability run- off requirements BANK Customer relationship and franchise CUSTOMERS Term funding Full service bank Yield benchmark Consistency of returns Diversity of provider and counterparties Liquidity needs Overall banking needs Return on capital


10 10 Audience question 1 A.Liquidity B.Yield C.Consistency of yield D.Diversity of provider Q. How do you prioritise the following objectives for cash management? (Rank from most to least important)

11 11 Audience question 2 A.Increased B.Decreased C.Steady Q. What have you seen happen in rates offered by banks for your cash management/deposit needs over the past six months?

12 12 Audience question 3 A.Increase B.Decrease C.Steady Q. What do you anticipate will happen to cash management/deposit rates offered by banks over 2015?

13 13 Audience question 4 A.Capital preservation B.Liquidity C.Certainty of returns D.Maximising cash returns Q. For super fund members that specifically leave money within the Cash option, what do you believe they are primarily focused on?

14 14 Audience question 5 A.Longer dated term deposits B.More structured deposit products – e.g. notice period, rolling term deposits C.Include non-cash, liquid investments – e.g. bank paper D.Business model change – e.g. introduce member/intermediary platform Q. With a low rate environment persisting, what would you consider for enhancing cash returns? (Rank from most to least relevant)

15 15 DISCLAIMER AND CONFIDENTIALITY IMPORTANT NOTICE: The document may be restricted by law in certain jurisdictions. Persons who receive this document must inform themselves about and observe all relevant restrictions. 1. Disclaimer for all jurisdictions Except if otherwise specified in section 2 below, this document is issued and distributed in your country/region by Australia and New Zealand Banking Group Limited (ABN11 005 357 522) (“ANZ”), on the basis that it is only for the information of the specified recipient or permitted user of the relevant website (collectively, “recipient”). This document may not be reproduced, distributed or published by any recipient for any purpose. It is general information and has been prepared without taking into account the objectives, financial situation or needs of any person. 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