Strategic Impacts from Basel III LCR Changes

The anticipated crunch on small corporate funding, much warned about previously, has been delayed as the Basel Implementation schedule and rules slip, although bank funding is still hard to come by for corporate treasuries at smaller firms. For larger corporates, which have tended to tap other funds anyway since the 2008 crash or got very advantageous bank lending terms for their large steady accounts as banks’ seek stability, the news could mean a continuation of the present environment. 

The high-quality liquid assets (HQLA) definition under Basel III has been widened significantly beyond government bonds and central bank deposits to include corporate bonds rated BBB- and above, equities, and some securitisations. Banks will also have an extra four years to meet the revised LCR requirements, which stipulate banks to hold sufficient high-quality liquid assets to meet 30 days of likely cash withdrawals in a stress situation. Bank shares soared on the news. 

Along with the market enthusiasm for the changes, some observers saw positive outcomes for countries and companies. Bank of England governor, Mervyn King, said that, “nobody set out to make it [LCR] stronger or weaker, but to make it more realistic”. 

Ernst & Young’s head of prudential advisory, Patricia Jackson, told ‘Bloomberg’ that whereas the previous design of the Basel III rules threatened to limit banks capacity to lend because of the very large liquidity buffers which banks would have had to hold, the revisions would help ensure that costs on banks and therefore their clients’ products are “introduced more gradually”. 

Reuters columnist James Saft, on the other hand, said the changes: “Will fuel demand for riskier debt, such as mortgage-backed securities and corporate bonds, and takes the financial world a substantial step backwards towards its pre-crisis set of incentives.” 

While the news is indeed a welcome respite for many banks, it has implications beyond just changed liquidity requirements and extended timelines. While bankers are still working through the full impact, preliminary indications are that there could be significant shifts in several areas.

Basel III Rules Relaxed: Asia Reacts

Central banks around Asia, some of which were at the forefront of early adoption of Basel III requirements, may decide to reassess and revise their plans after the LCR announcement. A number of central banks in the region had promulgated rules that moved towards earlier implementation of Basel III guidelines. And just in December, the Reserve Bank of Australia (RBA) and the Australia Prudential Regulation Authority (APRA) announced that authorised deposit-taking institutions would be able to establish a committed secured liquidity facility with the RBA to cover shortfalls between the their holdings of high-quality liquid assets and the LCR requirements. 

Now, regulators around the region may opt to relook at how they will implement the policies and potentially revise earlier requirements. Since the facilities in Australia were predicated upon earlier Basel III announcements, for example, the RBA and APRA may need to adjust their plans. Central banks in other markets in Asia may make shifts as well. 

Second, financial institutions may decide to change their own strategies in a variety of ways. Under the previous version of the requirements, financial institutions were looking at how they could quickly attract longer term deposits, with a duration of more than 30 days, to meet liquidity requirements. They have also been looking at how to take advantage of technology or develop new services that would quickly help them gain a competitive advantage for locking in ‘operational deposits’ from corporate clients, which are valued more highly for liquidity under Basel III. 

With the shift in liquidity requirements and what counts as HQLA, some financial institutions may decide that they need to make significant revisions to their long-planned well-developed strategies to attract deposits to comply with Basel III, potentially good news for treasurers. 

Changes could also include slowing down implementation of operational or technology changes, which could significantly reduce costs in the near term. Domestic banks may also gain some breathing room to keep up with multinational competitors. 

Even though it’s clearly still early days after the Basel Committee announcement, and more changes may yet well be on the way, bankers will undoubtedly be delighted with the move and at the same time may need to work hard to revise their long-planned strategies. Treasurers should be examining the potential implications for future bank funding. 



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