Banks are selling clients short with short dated cash deposit U-turns

Banks have sold their clients short by doing a U-turn on short dated cash deposits, argues Gunjan Chauhan, head of cash at State Street Global Advisors, EMEA.

Basel III and money market fund regulations have increased challenges in short-term borrowing and investments for all institutional participants.  Investments, yield, principal protection and liquidity have all been impacted by regulation and banks are charging for excess deposits and imposing deposit caps.

“Due to the rate-driven environment and Basel III regulation, many corporate treasurers, who may have in the past been very reliant on the banking sector to provide them with cash management solutions, have been forced to explore alternative options,” she tells GTNews.

Basel III legislation makes it difficult for banks to take in short dated cash deposits. However, “now that the rate environment has begun improving, short dated deposits are now more attractive to banks in US dollars,” she explains.

“It can be challenging for a client when a bank gives them a message one year and then because of market changes, shifts their position the following year” Chauhan continues.

Gunjan argues that banks should be implementing “one solution that actually works under any under any rate or regulatory environment. And more importantly, is going to be in line with what the customer needs”.

A catalyst for a fundamental transformation

Some companies were launched specifically to target this gap the market, such as Liquidity Marketplace (LMX).

The introduction of Basel III liquidity measures and money market fund (MMF) reform have been the “catalyst for a fundamental transformation of short term liquidity markets,” Thomas Schickler, LMX CEO, tells GTNews.

“Since the introduction of Basel III’s leverage ratio, liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), the large global banks have needed to manage their deposit capacity carefully to ensure adequate returns on risk weighted assets,” argues Schickler.

However, this created a banking services gap for businesses. Without being able to rely on banks to store short dated cash deposits, businesses have compensated with a larger portfolio allocation to commercial paper, US Treasuries, agency debt, brokered certificates of deposit and short-term credit, according to Schickler.

Schickler argues that the market is underserved without new solutions for short term liquidity.

To tackle the problem, LMX created an all-to-all marketplace enabling institutional clients to trade short term liquidity directly with each other with no need for intermediation.

Low interest rates ‘hurting treasurers’

Schickler says: “Rising interest rates should result in some additional net interest margin opportunity and while this may mean some increased appetite for deposits, it will likely be at a lower rates than institutional clients would have achieved in similar market conditions pre-Basel III.

“One of the reasons that we created LMX was in anticipation of a reduction in banks’ appetite for short term deposits (as well as lending),” he adds.

Europe’s prolonged low interest rate environment is “hurting treasurers” as they can’t “leave a euro anywhere and get a euro back”, says Chauhan.

Money market funds are seeing the yields of around negative 40 in Europe. “If you leave money in overnight bank deposits, yields are anywhere from negative 50 to negative 100+,” she says.

“Treasurers want to know their money is safe. What is the path of least resistance? What we [State Street Global Advisors] are doing in these situations is to work with our clients to find them a sustainable solution that will meet their liquidity requirements,” she explains.

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