Taking Action: Essential Steps to Basel III Readiness

Speaking at the recent EuroFinance Cash & Treasury Management Conference in Miami, Daniel L. Blumen, CTP, partner with Treasury Alliance Group, US, notes that while Basel I and II did not have much of an impact on corporate treasury, the latest instalment from the Basel Committee on Banking Supervision (BCBS) is another story.

“Basel III is going to be different, not only because there is more capital required, but also because it slides into other areas – the liability side of the bank’s balance sheet and bank leverage,” Blumen explains. “This is really going to hit the depository services and treasury products that you deal with in every country in which you operate. So it really does matter to treasurers. Global treasuries will feel the impact even more because of the global systemically important bank (GSIB) designation.”

As regulators adopt their own versions of Basel III, the resulting changes to banks’ balance sheets, will have a substantial impact on corporates. The problem is, right now, not even the banks know what that impact will be.

Probable Scenarios

Despite this prevailing uncertainty, the group has compiled a number of likely outcomes that will affect treasurers, including the following:

  •  Basel III’s higher equity requirements are going to translate to a higher cost of credit products.
  •  The liquidity requirements will result in new pricing for depository services.
  •  The leverage requirements are going to translate to new pricing of other services.

The effects on deposits will be particularly significant. Corporates that use certain banks only as temporary repositories of funds and plan to eventually send their money elsewhere will not make themselves very popular, Blumen explains. There is also a question of whether there will be a reduction in the number of liquidity management products that banks offer.

On the borrowing side, costs are going to go up. “Overdraft finance is going to become more expensive. So, hypothetically, if your local affiliates are telling you, ‘We don’t need to have a large liquidity structure, because if things really get bad, we’ll just tap our overdraft for a couple of days,’ that’s not going to be as viable because that overdraft capacity you’re maintaining is going to cost more,” Blumen notes.

Additionally, new credit facilities will cost a lot more. Therefore, treasurers will need to be more attentive to their borrowing needs.

Bank relationships will also take a dramatic turn as a result of Basel III. Blumen notes that one bank hired 5,000 compliance professionals about a year ago. The remuneration needed for these extra hires mean that those compliance costs are significant. A bank may eventually decide that it is more efficient to eliminate its small relationships and only focus on large ones. “If you have a treasury management structure that uses a lot of little banks, they’re all going to have to go through the full [Know Your Customer (KYC)] on you, and they may just decide it’s not worth it to have this single, double, triple account relationship with you in just this one place,” Blumen explains.

The good news is that treasury management business will become even more appreciated at most banks. “Good, really stable treasury management business is going to be quantified desirable,” he adds.

Taking Action

Nevertheless, there are steps treasurers can take now to prepare for Basel III:

  1. Impact assessment: Treasurers should evaluate their organisation’s current state and what could happen to it once Basel III kicks in. What banking footprint does it have? What services does it require? “Validate your credit rating. Use the rating agencies, look at the banks – make sure that you correctly validate their assumptions and input because a lot of times, people may not have the correct rating,” Blumen urges “Ensure that you have visibility of all corporate liquidity. If [Sarbanes-Oxley (SOX)] and [the Foreign Account Tax Compliance Act (FATCA)] didn’t scare you into it, Basel III really ought to. In this day and age, you’ve got to have visibility over all your corporate liquidity.”
  2. Counterparty review: Identify your exposure to all of your banks, as well as customers and suppliers. Who are you engaging with? What is their situation? Make sure you enforce compliance with your policies.
  3. Risk-adjusted return on capital (RAROC) analysis: RAROC is a profitability tool banks developed about 20 years ago to determine what their corporate customers are really worth to them. RAROC takes all elements of the relationship, assigns risk ratings to each one and compares total risk to total return. Corporate treasurers need to do this for themselves. “It’s a way of identifying whether you’re giving your good or bad business to the wrong people,” Blumen suggests.
  4. Banking continuity plan: Much like the disaster recovery plans most corporates have in place, they should have banking continuity plans. Blumen notes that one major UK bank is withdrawing from certain types of treasury management business, which has impacted treasury departments. When those types of incidents occur, a treasury with a banking continuity plan can quickly determine which bank can fill that slot. “You should have a plan, because it’s our belief that in the next 18 months you’re going to have the opportunity to deploy it,” Blumen predicts.



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