Recent news reveals that more and more banks are adopting Basel III regulation into their operations, in order to manage their liquidity, supervision and risk.
Basel III (or the Third Basel Accord) was put in place in 2009, in response to the 2008 financial crisis to work alongside Basel I and Basel II. The new Basel rules, drawn up by the Basel Committee of Banking Supervision, focus on the risks of a bank run, a scenario where a large number of customers withdraw their deposits from a financial institution at the same time and either demand cash or transfer those funds to a safer institution that they believe to be more solvent than a bank.
Basel III aims to strengthen the transparency of banks through liquidity and leverage disclosures and under the regulation, all banks must provide the Reserve Bank with regular updates on their liquidity and leverage.
Dylan Erens from Top Tier Consulting explains that “Basel III effectively means that banks need to send a lot more information than they used to, and all major banks have to send updates on their liquidity position more than once a day.” From January 2016, “banks will be required to update the Reserve Bank on a real-time and regular basis.”
According to recent news reports, Yellowfin, a leader in business intelligence, is reportedly working with one of South Africa’s largest banks to create a technological solution that enables banking reports to be created quickly and easily. According to Erens, the bank required a live dashboard to provide a real-time view of the data and this aligns to the requirements that Basel III promotes from 2016.
Banks must also maintain certain levels of high-quality assets to discourage the probability of large cash outflows over a 30 day period which could lead to the financial instability of a bank.
Bruce C. Lynn told CFO Magazine that controlling assets can help the stability of the bank, but a need for more assets means that banks will need to acquire expensive capital which could in turn, decrease their profits. Alongside this, to avoid costs, some banks may pass on these costs to customers depending on “the level of a customer’s deposit balances and purpose.”
“Funds on deposit by companies kept for “operational purposes” are more valuable to a bank because these deposits are considered more stable than “nonoperational” or “excess” deposits. A more stable deposit base means banks need to worry less and keep lower levels of high-quality assets,” Lynn said.
Cash pooling is an effective way of ensuring that large cash outflows do not happen and banks can maintain a good reputation with no negative balances. However, as Lynn explains, cash pooling can make it harder for banks to understand which deposits are operational and which are just excess due to all the assets being grouped together into one account.
Banks will also need to question how best to use the unoperational cash and more importantly, ask how much liquidity is enough and how much risk is too much under the Basel III regulations, questions which should encourage regular bank reviews.
Lynn summarises that in order for Basel III to be implemented effectively, company treasurers need to reduce the complexity of their banking networks and focus on their relationships with banks to better manage risk and liquidity.
Standard & Poor’s Financial Services (S & P) analysts have looked at the impact of Basel III regulations on the liquidity of Islamic Banks and its new liquidity coverage ratio (LCR). They expect this will increase offerings of liquidity management instruments and issuers are more likely to list the exchange of bonds, or sukuk, as they are called in this part of the world.
From 1st April, the UAE Central Bank started accepting a wide range of sukuk as collateral for banks to access its special lending facility.
The Reserve Bank of India also announced late last month that they intend to make amendments to their capital adequacy and liquidity standard for lenders operating in the country and plan to align these more closely to the standards set by Basel III rules.
Basel III initiated a new kind of bank subordinated bond which amounted to €100 billion at the end of 2014, a figure which is predicted to reach several hundred billion euros in the coming years.
David Benamou, managing partner at Axiom Alternative Investments believes that Basel III is a regulation that has and will continue to help companies grow after experiencing the financial crisis. He says that Axiom “see a significant opportunity in this new generation of subordinated debt which is emerging as a result of Basel III with the aim of replacing legacy bonds by 2022.”
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