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ICD Intelligencer: BANKING ON BASEL III

ICD Intelligencer: BANKING ON BASEL III · ICD Intelligencer: BANKING ON BASEL III. 3 From fewer repos to lower inventories of bonds, ... India Indonesia Italy Japan Korea Luxembourg

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ICD Intelligencer:BANKING ON BASEL III

2

Executive Summary Basel III is a global, voluntary regulatory standard on bank

capital adequacy, stress testing and market liquidity risk.

It is the most complete overhaul of U.S. and international

bank capital standards in over two decades. The Basel III

framework significantly changes bank rules in 46 countries

including all G-20 members. While there are differing

sovereign approaches in adopting these new regulations,

Basel III is an enormous and complex initiative, that is

itself a work in progress, where final rules are likely to be

amended and subject to further calibration.

NEW BASEL III RULES

Basel III’s new liquidity standards specified in the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) aim to limit over-reliance on short-term wholesale funding.

Basel III Rules include:

• Liquidity Coverage Ratio (LCR) – Beginning on January 1, 2015 • Net Stable Funding Ratio (NSFR) – Phased in through January 1, 2019 • Quality of Capital – Ineligible capital phased out by 2018• Quantity of Capital – 3 new types of capital requirements – January 1, 2019• Higher Minimum Tier 1 Capital Requirement – January 1, 2015• Capital Conservation Buffer – Current• Countercyclical Capital Buffer – Current• Higher Minimum Tier 1 Common Equity Requirement – January 1, 2015• Leverage Ratio – phased through January 1, 2018• Minimum Total Capital Ratio – Currently 8%

Basel III regulations will dis-incentivize non-operational bank deposits and may reduce investment supply.

For corporations, the principal effects include:

• The necessity to strengthen bank relationships for operational deposits• Further diversification of investment products • Heightened, increased risk management requirements for expanded

portfolio

As yields begin to rise, corporations will look to optimize return within their risk and liquidity parameters.

Banks may be likely to steer customers and their funds away from deposits to non-balance-sheet products such as money market accounts or short duration bond funds and other products with greater yield but less liquidity. Companies need to rethink how they invest surplus cash to obtain acceptable yields, while maintaining the liquidity and level of security they require.

ICD Intelligencer:

BANKINGON BASEL III

3

From fewer repos to lower inventories of bonds, financial institutions are responding to more stringent capital standards enacted by regulators.

Potential Repo Market consequences:

• Higher borrowing costs for governments and companies

• Declines in liquidity in times of market stress

• Wider gaps between bid and offer prices

• Reduced speed of completing trades

Corporate treasury must widen their asset allocation of investment portfolios.

Corporates must seek a greater portfolio diversification of counterparties, countries and prod-ucts. With banks dis-incentivized to hold non-operating deposits, a lower supply of repo and bonds, treasury departments must also look for alternative longer-term investments and expand liquidity planning.

Corporate portfolios will be diversified with multiple investments within several investment product categories, including:

• Alternate Investment Products

• Uninsured Bank Deposits

• FDIC Brokered CDs

• Treasury Institutional MMFs

• Government Institutional MMFs

• Prime AAA Institutional MMFs

• General Purpose Prime Institutional MMFs

• Government Ultra Short Bond Funds

• Prime Ultra Short Bond Funds

• Government Separately Managed Accounts

• Prime Separately Managed Accounts

• Direct Investments

Increased need for secure and efficient trading, reporting and analytics that details a portfolio’s aggregated exposure to counterparties.

With expanded portfolios, corporations will need to find ways to trade and analyze exposures as securely and efficiently as possible.

Continued importance will be placed on evaluating the relative financial strength of counterparties and ensuring that portfolios comply with investment guidelines.

It’s not enough to understand the portfolio counterparties – corporations must have efficient ways to evaluate the relevant financial strength of counterparties. This becomes more important with expanded portfolios.

The good news is that the fundamentals that anchor corporate treasury remain the same. The core objectives of preservation of capital, liquidity and yield through diversification, analytics, compliance, optimization and archiving are unchanged even as the rules and regulations evolve around them.

ICD Intelligencer:

BANKINGON BASEL III

4

1 LEVER:BASEL II C A P I TA L

BASEL III C A P I TA L L I Q U I D I T Y L E V E R A G E3 LEVERS:

Capital Adequacy

Net Stable Funding Ratio (NSFR)Liquidity Coverage Ratio (LCR)

Leverage Ratio

1

1 2 3

The Basel provisions are internationally agreed standards that are not legally binding. Countries adopt the Basel standards through national legislation.

Basel III strengthens capital adequacy in all three components (capital resources, risk weighted assets and capital ratios)

Basel III introduces a regime that promotes both short-term and long-term resiliency to liquidity shocks

Basel III introduces a regime that constrains leverage in the banking sector and mitigates model risk through non-risk based measures

C A P I TA L

1

LIQUIDITY

2

LEVERAGE

3

LIQUIDITY ASSETS ≥ 100%30 DAY NET CASH OUTFLOW

AVAILABLE STABLE FUNDING ≥ 100%REQUIRED STABLE FUNDING

CAPITAL RESOURCES ≥ CAPITAL RATIORISK WEIGHTED ASSETS

TIER 1 CAPITAL ≥ 3%EXPOSURE

TIER 1: Tier 1 capital is consistent with the measure used for capital adequacy

EXPOSURE: Exposure is determined on a non-risk basis, generally following the accounting measure. Comes into force on January 1, 2018 following parallel runs from January 1, 2013

LIQUID ASSETS: Stock of high quality liquid assets in stressed conditions; must be unencumbered and ideally central bank eligible

NET CASH OUTFLOW: Net cash outflow over a 30 calendar day period under a prescribed stress scenario

Comes into force on January 1, 2015; observation period started January 1, 2011

CAPITAL RESOURCES: Increase to common equity Tier 1 (CET1) and total Tier 1 capital ratios including new capital conservation and countercyclical capital buffers. CET1 capital ratio increases from 2% to 7% (including the capital conservation buffer)

Phased in from January 1, 2013 to January 1, 2019

RISK WEIGHTED ASSETS: More robust standards and criteria to determine eligibility of instruments as capital. Deductions and prudential filters such as financial investments and minority interests become more onerous.

Came into force on January 1, 2013 with some transitionals out to January 1, 2019

CAPITAL RATIO: Strengthening of counterparty credit risk capital including the introduction of a new credit valuation adjustment (CVA) capital charge, use of stressed inputs into model calculations, changes to the capital treatment of collateral and higher capital for exposures to central counterparties.

Came into force on January 1, 2013

AVAILABLE FUNDING: Equity and liability funding expected to be reliable sources of funds over a one year time horizon

REQUIRED FUNDING: Assets and exposures requiring stable funding over a one year time horizon

Comes into force on January 1, 2018; observation period started January 1, 2011

ICD Intelligencer:

BASEL IIIAT-A-GLANCE

Source: Basel Committee On Banking Supervision

5

Table of Contents

Introduction

Banking on Basel III

Basel III - Operational Versus Non-Operating Deposits

Basel III - New Liquidity Standards

Basel III - Increase in the Cost of Capital

Basel III - Global Systemic Important Banks (G-SIB)

Basel III - Additional Basel III Standards

Banks Struggle Toward Stability

Alternative Investment Products

Be Prepared

Coda

6

8

10

14

17

19

20

22

24

26

27

ICD Intelligencer:

BANKINGON BASEL III

6

Introduction We are witnessing an historic era of change in banking and corporate treasury.

The U.S. Basel III final rule was approved in July 2013 by

three U.S. banking regulators: The Federal Reserve; The

Office of the Comptroller of the Currency (OCC); and the

Federal Deposit Insurance Corporation (FDIC). It is the

most complete overhaul of U.S. bank capital standards in

over two decades.

The U.S. Basel III final rule applies to the entire U.S. banking

sector, from community banks to regional banks to the larg-

est and most global U.S. banking organizations. The final rule

also applies to U.S. bank subsidiaries and U.S. bank holding

company subsidiaries of foreign banks.

This ICD Intelligencer provides a brief summary of the key

and pertinent regulatory rules (the U.S. Basel III capital rule

is more than 970 pages) that will impact corporate treasury

practices, investment product selection and guide the tech-

nological implementation necessary to function in this new

environment.

ICD Intelligencer:

BANKINGON BASEL III

BASEL II

PILLAR IMinimumCapital

Requirements

PILLAR IISupervisory

ReviewProcess

PILLAR IIIDisclosure &

MarketDiscipline

BASEL III

PILLAR IEnhancedMinimumCapital

& LiquidityRequirements

PILLAR IIEnhanced

SupervisoryReview Processfor Firm-wide

Risk Managementand CapitalPlanning

PILLAR IIIEnhanced RiskDisclosure &

MarketDiscipline

7

The Intelligencer has drawn exposition, commentary and

expert analysis from the thought leaders in our industry who

greatly help in providing clarity on Basel III’s complex set of

changes and their implications. We thank them for their ex-

pertise and insight. It is important to understand that these

rules, even ones identified final, are still a work in progress

and are subject to observation, revision and amendment.

It is also important to note that countries will deploy Basel III

at their own pace and different treatments will emerge

from country to country in the near term. Domestic liquidity

regimes are still in place (e.g. The UK still adheres to the FCA

ILAA regime) and it is not yet clear to what extent domestic

regulators will allow Basel III to replace these regimes entire-

ly or whether they will run concurrently for a period of time.

The U.S. and E.U. rules implementing Basel III follow many

aspects of Basel III closely, but there are major differences

in approach in several key areas – such as treatment of cap-

ital instruments, risk weight calculation and the leverage

ratio. There are also differences in the gradual “phase in” of

certain rules – the detail of these are beyond the scope of

this publication. Basel III is a global endeavor and The Basel

III framework incorporates the G-20 (including Russia and

China) and the 28 member states of the E.U. that brings the

total participating countries to 46.

Of great relevance to practitioners is that treasury tech-

nologies have made significant advances over the past six

years and are already providing efficiency, automation,

intelligence and greater security for next-generation trea-

sury departments. In consideration of the challenges that

Basel III, SEC reform and economic policy have created for

corporations, treasurers are strongly encouraged to adopt

new technologies and integrate these powerful treasury

applications with their ERP, TMS and banking systems.

Now for a closer look at Basel III.

ICD Intelligencer:

BANKINGON BASEL III

THE BASEL III WORLDThe Basel Committee Members:

ArgentinaAustraliaBelgiumBrazilCanadaChinaCroatiaFranceGermanyHong Kong SARIndiaIndonesiaItalyJapanKoreaLuxembourgMexicoNetherlandsRussiaSaudi ArabiaSingaporeSouth AfricaSpainSwedenSwitzerlandTurkeyUnited KingdomUnited States

Additional EU Member States:

AustriaBulgariaCyprusCzech RepublicDenmarkEstoniaFinlandGreeceHungaryIrelandLatviaLithuaniaMaltaPolandPortugalRomaniaSlovakiaSlovenia

Present Chairman of the CommitteeMr. Stefan IngvesGovernor of Sveriges RiksbankSweden’s central bank

8

Banking On Basel IIIThe Basel Committee of the Bank for International Settle-

ments has introduced sweeping new rules known as Basel III

(or the Third Basel Accord) that amend the existing standards

of Basel I and Basel II. New Basel III rules are now making

their way through the financial institutions as banking sys-

tems prepare to implement several of the key rules, such

as the Liquidity Coverage Ratio (LCR), beginning on January

1, 2015. Other rules such as the Net Stable Funding Ratio

(NSFR) will be phased more gradually through January 1,

2019 when total Basel III implementation is expected to be

in place. Basel III is already beginning to create an impact

on bank capital, liquidity, and leverage requirements.

The wide-ranging outline of the Basel III framework was

agreed in 2009 by the Basel Committee’s oversight body

and was further developed over the course of 2010. In

December 2010 the Basel Committee issued two publica-

tions containing a near final version of its new rules and

followed in January 2011 with the final elements of reform

to the redefinition of regulatory capital. (The word “final”

used here is a somewhat loose term that speaks to con-

ceptual and structural implementations that are subject

to observation periods and revision – hence descriptions

such as “interim final rules”, etc.)

The three publications, collectively known as Basel III,

significantly change the capital, liquidity and leverage

rules for international banks. The causal sequence of

Basel III is already beginning to transform bank behavior

and it is beginning to impact treasury practitioners as this

global banking regulatory framework imposes challenging

new corporate treasury complexities on corporate cash

flow, deposit and loan interest rates.

The response from the banks is likely to be multi-pronged.

There will be pricing changes to reflect higher liquidity

carry-costs, especially for non-operational fixed income

balances, but also we will see banks develop more regu-

latory efficient products (e.g. 35-day Notice account) to

“Although some of the fine points of Basel III are still being worked out, the broad princi-ples have been settled. And while there’s no global enforcement body – each country has the sovereign ability to determine how the rules apply to its banks – there will be strong pressure to make enforcement homogenous. Bank regulators certainly don’t want to see arbitrage across political jurisdictions.”

– Treasury Strategies, Basel III - Changing The Rules Of The Game For

Corporate Treasurers,May 7, 2014

ICD Intelligencer:

BANKINGON BASEL III

9

take balances outside the reach of the LCR. The operational

deposit definition will also see the development of ap-

propriate product attributes to mitigate the LCR impact

for clients and banks alike. This will require clients to

get back into the discipline of proper cash planning and

structuring of cash portfolios. MMFs should get a boost as

an alternative home for non-operational balances.

But this prognosis is speculative and the medicine that

banking regulators are prescribing is potent. For banks,

Basel III’s principal effects are increased capital reserves,

improved liquidity and restricted leverage. For corporations,

the principal effects will be a need to strengthen bank

relationships for operational deposits, further diversification

of investment products and heightened risk management

of their expanded portfolio.

ICD Intelligencer:

BANKINGON BASEL III

Basel III Capital & Liquidity Rules Implementation Timeline

“For corporate treasurers, the stakes are very high. Commercial banks, for many, are the primary sources of credit; that will change for some firms. Commercial banks are the primary repositories of corporate cash, and that will also change for some firms. Com-mercial banks are the primary providers of transaction and payment services. That too will undergo disruption.”

– Treasury Strategies, Basel III - Changing The Rules Of The Game For

Corporate Treasurers,May 7, 2014

Basel III: Capitaland Liquidity 2011 2012 2013 2014 2015 2016 2017 2018 2019

4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0%

4.5% 5.5% 6.0% 6.625% 7.25% 7.875% 8.5%

8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

8.0% 8.0% 8.0% 8.625% 9.25% 9.875%

Migrationto Pillar 1

10.5%

Minimum tier 1capital

Minimum tier 1capital + capitalconservation buffer

Minimum totalcapital

Minimum totalcapital +connservation buffer

Capitalinstruments thatno longer qualify

Internationalleverage ratio

Net stablefunding ratio

Liquidity coverage ratio

Phased out over 10 year horizon beginning in 2013

Parallel run (disclosure starts 2015)Supervisory Monitoring

Minimum Standard

Observation Period

Observation Period

Minimum Standard

10

Basel III - Operating Versus Non-Operating DepositsPerhaps the most direct way that corporate treasury

departments will have to adjust to Basel III is in the new

definitions of corporate operating and non-operating de-

posits. Banks will disincentivize corporations from making

non-operating deposits. Corporations will therefore need

to develop a deeper strategic operating relationship with

banks and find a new home for non-operating deposits.

“Corporate treasurers have historically valued banks for

the liquidity they can provide. Soon, banks will value cor-

porate treasuries for the kind of liquidity they can provide.

Treasuries have historically, looked to banks for stability,

places they can move money into or out of at a moment’s

notice. Soon, banks will look at corporations according

to how much they add to or take away from the bank’s

stability.

From the bank’s perspective, companies that consume

stabilizing products and services, and that provide stabi-

lizing deposits, will be more highly sought after. Those

with destabilizing products, services and balances will

almost surely pay a higher price – if they are banked at

all. The type of deposit a bank used to covet may now be

an unwelcome burden. One can imagine many cases in

which a bank would no longer accept volatile deposits

such as daily sweeps into investment vehicles.” - Treasury

Strategies, Changing The Rules Of The Game For Corporate

Treasurers, May 7, 2014

ICD Intelligencer:

BANKINGON BASEL III

Operating Deposit Definition

Operating Deposit refers to unsecured whole-sale funding that is required for the banking organization to provide operational services as an independent third-party intermediary to the wholesale customer or counterparty providing the unsecured wholesale funding.

11

The Basel III “operational deposits versus non-operational

deposits” definition has not been finalized, however Davis/

Polk has provided a thorough working description of the

current definition.

OPERATIONAL SERVICES

• Payroll remittance

• Payroll administration and control over the distribution of funds

• Transmission, reconciliation, and confirmation of payment orders

• Daylight overdraft

• Determination of intra-day and final settlement positions

• Settlement of securities transactions

• Transfer of recurring contractual payments

• Client subscriptions and redemptions

• Scheduled distribution of client funds

• Escrow, funds transfer, stock transfer and agency services, including payment and settlement services, payment of fees, taxes and other expenses

• Collection and aggregation of funds

(source: Davis/Polk)

ICD Intelligencer:

BANKINGON BASEL III

“If you have a deep, broad treasury manage-ment relationship with a specific client, then the majority of those balances stand a good chance of being deemed operating. If your relationship is just holding deposits, those balances are more likely to be defined as non-operating.”

– Elizabeth MinickHead of U.S. Corporate Treasury Sales

for Bank of America Merrill LynchGlobal Transaction Services

12

ICD Intelligencer:

BANKINGON BASEL III

OPERATIONAL DEPOSITS RECOGNITION REQUIREMENTS

In order to recognize a deposit as an operating deposit, a

banking organization must comply with all of the following

requirements:

• The Deposit must be held pursuant to a legally binding written agreement, the termination of which is subject to a minimum 30-day notice period or significant ter-mination costs are borne by the customer providing the deposit of a majority of the deposit balance is with-drawn from the operational deposit prior to the end of the 30-day notice period.

• There must not be significant volatility in the average balance of the deposit.

• The deposit must be held in an account designated as an operational deposit.

• The customer must hold the deposit at the banking or-ganization for the primary purpose of obtaining the op-erational services provided by the banking organization.

• The deposit account must not be designed to create an economic incentive for the customer to maintain excess funds therein through increased revenue, re-duction in fees, or other economic incentives.

• The banking organization must demonstrate that the deposit is empirically linked to the operational services and that it has a methodology for identifying any excess amount, which must be excluded from the operational deposit amount

• The deposit must not provided in connection with the banking organization’s provision of operational services to an investment company, investment advisor, or a non-regulated fund

• The deposit must not be for correspondent banking ar-rangements pursuant to which the banking organization (as correspondent) holds deposits owned by another depository institution (as respondent) and the respondent temporarily place excess funds in an overnight deposit with the banking organization

(source: Davis/Polk)

The U.S. banking agencies stated that they intend to closely monitor classification of operational deposits by banking organiza-tions to ensure that the deposit meet these requirements.

– Davis Polk

13

ICD Intelligencer:

BANKINGON BASEL III

As corporate treasury relationships involving non-operating

cash deposits become less attractive for banks going forward,

banks may be likely to steer customers and their funds away

from deposits, which reside on the bank’s balance sheet, to

non-balance-sheet products such as money market accounts

or short duration bond funds and other products with greater

yield but less liquidity.

“Companies will need to rethink how they invest surplus cash

to obtain acceptable yields, while maintaining the liquidity

and level of security they require. Additionally, companies

must make sure their cash flow management and forecasting

moves cash through the company efficiently and predictably

in order to facilitate efficient use of surplus cash.

The link between Basel III and companies’ cash flow manage-

ment is not immediately obvious to many corporate treasur-

ers. It is widely appreciated that Basel III is one of the most im-

portant regulatory changes to have emerged in recent years

as governments, central banks and regulators work to bring

greater stability to the global financial system.

However, the general perception is that the impact of the

regulation’s principal measures — increased capital reserves,

improved liquidity and restricted leverage — will be isolat-

ed to the banking sector. In reality, the impact of many Basel

III measures are already being felt by companies as banks

change their operational behavior in advance of the start of

implementation in January 2015.

Yields on bank demand deposits for investment cash — which

are historically low because of low interest rates — are set to

remain that way to offset the associated loss of liquidity val-

ue for banks. Alternatively, companies seeking an acceptable

return can explore a range of term and investment products.”

– Peter Fox Head of U.S. Liquidity Product Management, Bank

of America Merrill Lynch

14

Basel III - New Liquidity Standards“More than five years after the financial crisis, reforms

designed to make the financial system safer are filtering

down to the world of corporate treasury. Basel III capital

standards are starting to affect companies’ relationships with

their banks, while the prospect of changes in the regulations

governing money-market funds has created uncertainty

around short-term investing.”

“[Anthony Carfang, a partner at consultancy Treasury

Strategies] pointed out that as national regulations imple-

menting the Basel III standards are phased in beginning

next year, two parts of the standards will have particular

relevance for treasuries: the leverage ratio and the liquidity

coverage ratio.

The leverage ratio limits how big a bank’s balance sheet

can be, which means banks may have less interest in mak-

ing loans. That’s why a treasurer’s got to make sure that the

company’s borrowing resources are diversified and they’re

not simply reliant on banks for short- and intermediate-term

funding. The leverage ratio probably also increases the

cost of borrowing, but slightly.” – Susan Kelly, Treasury &

Risk Magazine, Basel III Reshapes Banks’ Relationships

With Corporate Treasury – May 21, 2014

Basel III’s new liquidity standards encapsulated in the

Liquidity Coverage Ratio (LCR) and the Net Stable Fund-

ing Ratio (NSFR) aim to limit over-reliance on short-term

wholesale funding. However, much ambiguity remains in

their definitions.

“The Liquidity Coverage Ratio – an essential component of the Basel III reforms – has since been revised, most recently in January 2014. This simple, non-risk based “backstop” measure will restrict the build-up of exces-sive leverage in the banking sector. Basel III’s leverage ratio is defined as the “capital measure” (the numerator) divided by the “exposure measure” (the denominator) and is expressed as a percentage. The capital measure is currently defined as Tier 1 capital and the minimum leverage ratio is 3%. The fi-nal calibration, and any further adjustments to the definition, will be completed by 2017, with a view to migrating to a Basel III Pillar 1 (minimum capital requirement) treatment on 1 January 2018.”

– BetterRegulation.com

ICD Intelligencer:

BANKINGON BASEL III

15

1. The Liquidity Coverage Ratio (LCR) is designed to help

determine whether banks have enough high-quality liquid

assets to protect themselves in a stress scenario from a

30-day deposit run-off. The Liquidity Coverage Ratio or

LCR will begin in 2015.

Liquidity Coverage Ratio (LCR) =

2. The Net Stable Funding Ratio (NSFR) is designed to

achieve a similar objective of the LCR over a one-year

horizon, and is scheduled to go into effect January 1, 2018.

The Net Stable Funding Ratio complements the LCR and

is designed to promote prudent funding structures by

banks, with a particular focus on preventing over-reliance

on short-term wholesale funding. It specifically excludes

short-term wholesale funding.

The NSFR is intended to influence structural liquidity pro-

files. Global supervisors are currently working on a revised

version. The final ratio for the NSFR will be released some-

time in 2014. The net stable funding ratio has received rel-

atively little attention due to its seemingly distant imple-

mentation date of January 1, 2018. However, its impact will

be immediate and significant for many banking institutions

and corporate treasury departments.

The NSFR measures long-term assets that are funded by

long-term, stable funding including customer deposits,

long-term wholesale funding and equity. The NSFR is de-

fined as – the amount of Available Stable Funding (ASF)

relative to the amount of Required Stable Funding (RSF)

– and its calculation is summarized as: ASF / RSF. The result

should be greater than or equal to 100%.

Net Stable Funding Ratio (NSFR) =

ICD Intelligencer:

BANKINGON BASEL III

Wholesale-Funding Strategy

“The change in the net cash outflow calcu-lation will impact wholesale-funding strate-gies. Unlike retail deposits, wholesale fund-ing typically matures in large volumes on specific dates; offsetting inflows are usually distributed around the funding maturity. To the extent such cash inflows are expected after the corresponding cash outflows, there will be a mismatch.

Traditionally, banks have been managing such mismatches through the use of over-night/short-term funding, such as Federal Reserve funds or repos. Under the proposed methodology, banks will be required to hold additional high quality liquid assets (HQLA) toward such mismatches. ”

– Ernst & Young: Enhanced prudentialstandards for the liquidity coverage ratio

Stock of unencumbered high-quality liquid assets

Net Cash outflows over a 30-day time period≥ 100%

Available amount of stable funding

Required amount of stable funding per asset category≥ 100%

16

ICD Intelligencer:

BANKINGON BASEL III

These two key Basel III liquidity requirements LCR and NSFR

could materially change the way banks assess corporate

deposits. The balance sheet structure, including composition

of assets and liabilities, is driven by the bank’s business strate-

gy – and by regulation. Basel III mandates that banks have to

reconsider their appetite for various types of business.

Corporate treasurers and cash managers will need to adjust

to a rapidly evolving set of new regulatory challenges arising

from Basel III as well as recent money market fund Rule 2a-7

reform and the anticipated Fed October 2014 wind down of

the latest quantitative easing. Yet Basel III’s capital require-

ments, liquidity coverage ratio and net stable funds ratio

rules may be the most transformative for corporate treasury

departments and their banks because they alter the core

characteristics of some of their most popular transactions.

“Banks’ greater focus on pricing for risk means that they are

less likely to offer lending lines as a “loss leader” to build

cash management and deposit relationships with corporate

clients. Under Basel III’s leverage and liquidity requirements,

this strategy becomes less attractive even for large, highly

rated companies.

The leverage ratio requires banks to set aside capital even

against lowest risk assets. In addition, the liquidity ratios will

make corporate cash deposits a less attractive and more

expensive form of funding for banks. Under the net stable

funding ratio (NSFR), long-term corporate loans and oth-

er long-term assets will need to be matched by long-term

funding, and under the liquidity coverage ratio (LCR), banks

will have to hold high quality liquid assets (e.g. Treasuries)

against a portion of these deposits.

The LCR requires that a bank hold a prescribed amount of

high-quality (but typically lower-yielding) assets to mitigate

the risk that less “sticky” types of short-term funding could

run off during a stress event. For now, U.S. regulators are fo-

cusing their efforts on the LCR and are expected to address

the NSFR at a later date.” – Roger Merritt, Ian Rasmussen,

Kellie Geressy-Nilsen: Corporate Cash Management Faces

Basel III Challenges - Fitch Wire/Fitch Ratings – June 04, 2013

“The liquidity coverage ratio (LCR) is expected to have an even greater effect on treasurers’ dealings with their banks. The ratio, which measures whether banks are prepared to handle cash outflows over a 30-day stress period, divides bank deposits into two cat-egories: operating deposits, those linked to bank services like payments or payrolls, which are seen as more stable, and non-op-erating deposits.

Under Basel III, operating deposits ‘reflect a deep relationship with the customer,’ Trea-sury Strategies’ Anthony Carfang said. ‘A non-operating deposit is considered to be extra money that the banks probably had to go out and pay a rate in order to attract, or money customers have on deposit that could leave quickly and therefore is less a source of liquidity for the bank.’ Regulators have yet to provide hard and fast definitions of the two types of deposits. Basel III standards make non-operating deposits much less attractive to banks; they will have to back them with high-quality liquid assets, such as government bonds.”

– Treasury & RiskMarch 2014

17

BASEL III - IncreaseIn The Cost Of Capital

QUALITY OF CAPITAL

• New definition of Tier 1 Capital much narrower in Basel III vs. Basel II

• Capital that is no longer eligible phased out starting in 2014 and is fully phased out by 2018

• Excludes capital previously allowable such as mortgage servicing rights, deferred tax assets, minority equity interest, treasury stock, goodwill and intangibles

QUANTITY OF CAPITAL

• Three new additional types of capital requirements increase minimum total capital form 7% under Basel II to as much as 16.5% under Basel III

• Capital Conservation Buffer (CCB) of 2.5% which is designed to improve the ability of banks to absorb stresses

• Countercyclical Capital Buffer of up to 2.5% can be imposed by national regulator during periods of rapid credit growth

“Compared to the earlier Basel I and II frame-works, Basel III proposes many additional capital, leverage and liquidity standards to strengthen the regulation, supervision and risk management of the banking sector. The new regulations raise the quality, consistency and transparency of the capital base and strength-en the risk coverage of the capital framework.

The capital standards and additional capital buffers require banks to hold more capital, and higher quality of capital, than under the earli-er Basel II rules. The leverage ratio introduces a non-risk based measure to supplement the risk-based minimum capital requirements. The liquidity ratios ensure that adequate funding is available during periods of stress.”

– Moody’s Analytics

ICD Intelligencer:

BANKINGON BASEL III

Basel II vs. Basel III Capital Ratios

4.5%

7%

9.5%8.5%

11%

2.5%

Core Tier 1 Ratio

+2.5%

+2.5%

+0 to 2.5%+0 to 2.5%

10.5%

13%Varies, depends oncounterparties countries

Basel III Countercyclical BufferBasel III Conservation BufferBasel III Minimum Add-onBasel II Minimum

8%

Tier 1 + Tier 2 Ratio

+2.5%

+0 to 2.5%

6%

4%

Core Tier 1 Ratio

+2%

+2.5%

18

ICD Intelligencer:

BANKINGON BASEL III

REGULATORY ELEMENT PROPOSED REQUIRMENT

Higher Minimum Tier 1Capital Requirement

Capital ConservationBuffer

CountercyclicalCapital Buffer

Higher Minimum Tier 1Common Equity Requirement

Liquidity Standard

Leverage Ratio

Minimum Total Capital Ratio

Source: Bank for International Settlements, Basel Committee on Banking Supervision.

• Tier 1 Capital Ratio: increases from 4% to 6%• The ratio is set at 4.5% from 1 January 2013, 5.5% from 1 January 2014 and 6% from 1 January 2015• Predominance of common equity will now reach 82.3% of Tier 1 capital, inclusive of capital conservation buffer

• Tier 1 Common Equity Requirement: increase from 2% to 4.5%• The ratio is set at 3.5% from 1 January 2013, 4% from 1 January 2014 and 4.5% from 1 January 2015

• A supplemental 3% non-risk based leverage ratio which serves as a backstop to the measures outlined above• Parallel run between 2013-2017; migration to Pillar 1 from 2018

• Remains at 8%• The addition of the capital conservation buffer increases the total amount of capital a bank must hold to 10.5% of risk-weighted assets, of which 8.5% must be tier 1 capital• Tier 2 capital instruments will be harmonized; tier 3 capital will be phased out

• Used to absorb losses during periods of financial and economic stress• Banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirement to 7% (4.5% common equity requirement and the 2.5% capital conservation buffer) in 2013• The capital conservation buffer must be met exclusively with common equity• Banks that do not maintain the capital conservation buffer will face restrictions on payouts of dividends, share buybacks and bonuses

• A countercyclical buffer within a range of 0% - 2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances• When in effect, this is an extension to the conservation buffer and so could result in a common equity requirement of as much as 9% in 2013 (4.5% common equity requirement, plus 2.5% capital conservation buffer, plus 2.5% countercyclical capital buffer)

• Liquidity Coverage Ratio (LCR): to ensure that sufficient high quality liquid resources are available for one month survival in case of a stress scenario. Phased introduction from 1 January 2015• Net Stable Funding Ratio (NSFR): to promote resiliency over longer-term time horizons by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing structural basis• Additional liquidity monitoring metrics focused on maturity mismatch, concentration of funding and available unencumbered assets

19

Globally Systemic Important Banks (G-SIB)A G-SIB is defined as a financial institution whose distress

or disorderly failure, because of its size, complexity and

systemic interconnectedness, would cause significant disrup-

tion to the wider financial system and economic activity.

- gfma.org

The Basel Committee on Banking Supervision has identified

a total of 29 banks that have been identified as Global

Systemically Important Banks (G-SIB).

In November 2011 the Financial Stability Board (FSB) published

an integrated set of policy measures to address the sys-

temic and moral hazard risks associated with systemically

important financial institutions (SIFIs). In that publication,

the FSB identified as global SIFIs (G-SIFIs) an initial group

of global systemically important banks (G-SIBs), using a

methodology developed by the Basel Committee on Banking

Supervision (BCBS).

The November 2011 report noted that the group of G-SIFIs

would be updated annually based on new data and published

by the FSB each November. Beginning with the November

2012 update, the G-SIBs were allocated to buckets corre-

sponding to the higher loss absorbency requirements that

they would be required to hold from January 2016.

The FSB and the BCBS have updated the list of G-SIBs, using

end-2012 data and an updated assessment methodology

published by the BCBS in July 2013. One bank has been

added to the list of banking groups identified as G-SIBs

in 2012, increasing the overall number from 28 to 29. The

group of G-SIBs will be next updated in November 2014.

– Financial Stability Board. 2013 Update of Global System-

ically Important Banks [G-SIBs] 11/11/2013)

ICD Intelligencer:

BANKINGON BASEL III

Unlike Basel I and Basel II, which focused on the level of bank loss reserve requirements for different assets classes, Basel III brings significant structural changes to banks which are aimed at strengthening bank capital requirements by increasing liquidity and decreasing bank leverage.

2.0%

BarclaysBMP ParibasCitigroupDeutsche Bank

2.5%

HSBCJP Morgan

3.5%

Currentlyempty

1.0%

Bank of ChinaBNY MellonBBVAGroupe BPCEIndustrial and CommercialBank of China LimitedING BankMitzuho FGNordeaSantanderSociéte GénéraleStandard CharteredState StreetSumitomo Mitsui FGUnicredit GroupWells Fargo

1.5%

Bank of AmericaCredit SuisseGoldman SachsGroupe CréditAgricoleMitsubishi UFJ FGMorgan StanleyRBSUBS

20

Additional Basel III StandardsBASEL III CAPITAL & LIQUIDITY STANDARDS

The new Basel III regulations will affect all banks, however

the severity of the impact will differ according to the type,

scale and location of banks.

Most banks will be impacted by the increase in quantity and

quality of capital, liquidity and leverage ratios, as well as the

enhanced requirements for pillar 2 and capital preservation.

Most sophisticated investment banks will be affected by the

amended treatment of counterparty credit risk, the more ro-

bust market risk framework and to some extent, the amended

treatment of securitizations.

HIGHER MINIMUM TIER 1 CAPITAL REQUIREMENT

• Tier 1 Capital Ratio: increases from 4% to 6%

• The ratio is set at 4.5% from 1 January 2013, 5.5% from 1 January 2014 and 6% from 1 January 2015

• Predominance of common equity will now reach 82.3% of Tier 1 capital, inclusive of capital conservation buffer

CAPITAL CONSERVATION BUFFER

• Used to absorb losses during periods of financial and economic stress

• Banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirement to 7% (4.5% common equity requirement and the 2.5% capital conservation buffer) in 2013

• The capital conservation buffer must be met exclusively with common equity

• Banks that do not maintain the capital conservation buffer will face restrictions on payouts of dividends, share buybacks and bonuses.

COUNTERCYCLICAL CAPITAL BUFFER

• A countercyclical buffer within a range of 0% - 2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances

• When in effect, this is an extension to the conservation buffer and so could result in a common equity require-ment of as much as 9% in 2013 (4.5% common equity requirement, plus 2.5% capital conservation buffer, plus 2.5% countercyclical capital buffer)

ICD Intelligencer:

BANKINGON BASEL III

21

HIGHER MINIMUM TIER 1 COMMON EQUITY REQUIREMENT

• Tier 1 Common Equity Requirement: increase from 2% to 4.5%

• The ratio is set at 3.5% from 1 January 2013, 4% from 1 January 2014 and 4.5% from 1 January 2015

LIQUIDITY STANDARD

• Liquidity Coverage Ratio (LCR): to ensure that sufficient high quality liquid resources are available for one month survival in case of a stress scenario. Phased introduction from 1 January 2015

• Net Stable Funding Ratio (NSFR): to promote resiliency over longer-term time horizons by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing structural basis

• Additional liquidity monitoring metrics focused on ma-turity mismatch, concentration of funding and available unencumbered assets

LEVERAGE RATIO

• A supplemental 3% non-risk based leverage ratio which serves as a backstop to the measures outlined above

• Parallel run between 2013-2017; migration to Pillar 1 from 2018

MINIMUM TOTAL CAPITAL RATIO

• Remains at 8%

• The addition of the capital conservation buffer increases the total amount of capital a bank must hold to 10.5% of risk-weighted assets, of which 8.5% must be tier 1 capital

• Tier 2 capital instruments will be harmonized; tier 3 capital will be phased out

• Regulatory liquidity risk reports will have to be produced at least monthly with the ability, when required by regulators, to be delivered weekly or even daily. This is challenging banks to put in place robust automated re-porting solutions to meet this need.

• The first challenge banks will face is to consolidate clean exposures, liabilities, counterparties and market data in a centralized risk data platform. All portfolios’ contractual and behavioral cash flows should be made available and banks should have the ability to stress those and produce liquidity gap analysis according to various scenarios. LCR buffer eligibility and haircut rules rely on external ratings, Basel classification of counterparties and standardized credit risk weights. The LCR numerator run-off rates as well as NSFR, Available Stable Funding and Required Stable Funding factors also depend on such information, usually only available in risk specific systems.

ICD Intelligencer:

BANKINGON BASEL III

“The next challenge banks face is interfacing or merging their current risk and finance systems to meet the new Basel III Liquidity Risk ratio requirements. The funding concen-tration monitoring requirement will require banks to put in place a clean hierarchical referential of counterparties for consolidat-ing their liabilities. Different LCR ratios will have to be produced per consolidation level and currencies. As it is already the case for credit risk rules, international banks will have to cope with various national discretions and local flavors for such new liquidity ratio rules and will have to generate various kinds of liquidity risk regulatory reporting templates in different electronic formats per jurisdiction.”

– Moody’s Analytics – Basel III Capital and Liquidity Standards, November 2013

22

Banks Struggle To StabilizeBasel III Liquidity Coverage Ratios are also impacting the

Repo market - a significant and substantial short-term staple.

Repo is facing bombardment by a variety of regulatory ac-

tivity, potential new taxation (FTT), additional new Leverage

Ratios from Dodd-Frank (Section 165) and added to Basel III

LCR-driven bank balance sheet requirements, this is going to

make Repo a more expensive, less attractive institutional

money commodity especially at month-end when financial

statements are produced. The new rules could translate

into a very volatile month-end market with wide spreads

as corporates hunt for month-end financing.

“Banks have choices to make: raise more capital or shed

assets. Deutsche Bank plans to cut a sizable chunk from

its repo business as part of the balance-sheet shrinkage, be-

cause they would have negative capital ratios if Dodd-Frank

Section 165 was in effect right now. Société Générale says

Dodd-Frank Section 165 will decrease its operations in the

US and with US customers. A Goldman Sachs presentation

not only showed that Repo businesses [at large banks] would

consume significantly more capital, they also estimate the

costs of doing Repo for these banks will increase between

9 and 77 basis points just from the Leverage Ratios. Mor-

gan Stanley announced in January 2013 that they’re cutting

assets in fixed income and commodities to less than $200

billion by the end of 2016, down from $390 billion at the end

of 2011. UBS plans to slash assets by 50% from 2011 to 2017.

According to Barclays, ‘Can banks address the $30bn of

additional capital we identified simply by reducing Repo?

The answer is yes’. One of the unintended consequences

of Leverage Ratios is that bank balance sheets will shed

risk-free (lower-yielding) assets (like Repo) in favor of more

speculative, higher-yielding assets. This will reduce the size

of the Repo market and bring back wider spreads.” – Scott

E.D. Skyrm, New Regulation And The Repo Market: Leverage

Ratios, Treasury NL - April 2, 2014.

“Basel III and other regulations aimed at reducing the risk of another financial crisis are starting to upend a key part of the bond market that expedites trading in everything from Treasuries to junk bonds. The U.S. re-purchase, or repo market where banks and investors borrow and lend Treasuries and other fixed-income securities shrunk to $4.6 trillion daily outstanding in July 2013, down 35 percent from a peak of $7.02 trillion in the first quarter of 2008, based on Federal Reserve data compiled from its 21 primary dealers.

From fewer repos to lower inventories of bonds, financial institutions are responding to more stringent capital standards imposed by regulators around the world. Already, the group of dealers and investors that advise the U.S. Treasury say that they see declines in liquidity in times of market stress, including wider gaps between bid and offer prices and the speed of completing trades. The potential consequences are higher borrowing costs for governments, companies and consumers.”

– Matt Levine By Liz Capo McCormick and Anchalee Worrachate – Repo Market Declines

Raises Alarm as Regulation Strains Debt – Bloomberg, August 19, 2013

ICD Intelligencer:

BANKINGON BASEL III

23

On July 9, 2014 Federal Reserve officials identified an end

date to the current quantitative easing, saying that they

will quickly cut off monetary injections from $35 billion a

month to zero by October 2014 if all goes according to

plan. Nothing was said about the possibility of rising inter-

est rates, though it is anticipated that the bond market will

price it in ahead of any official policy action taken. Expect

some corollary increase in interest rates.

With anticipated rising interest rates, Earnings Credit Rates

(ECRs) will become a diminishing factor in the fee services

calculus and with the addition of pressure from new Basel III

rules, as corporate non-operational cash deposits become

more of a burden than an asset on leaner bank balance

sheets.

All of these collective factors will require corporate treasury

to work smarter and with more discipline in evaluating

liquidity products and short-term investments. In addition

to more broadly diversifying asset classes in corporate port-

folios, practitioners will need to more carefully evaluate

and monitor the instruments of those asset classes and the

sponsors of their holdings.

Corporates will also need to seek a greater portfolio diver-

sification of counterparties, countries and products. With

banks dis-incentivized to hold non-operating capital, repo

and bonds, treasury departments will also need to look for

alternative longer-term investments and expand their li-

quidity planning processes to lay off cash. Where is the cash

going to go? It is likely to be placed with money market funds,

short duration bond funds, separately managed accounts

and direct investments.

ICD Intelligencer:

BANKINGON BASEL III

Possible new repo market scenarios:

1. Banks will only fund their own positions. If they’re long, they loan the securities, if they’re short, they borrow them. Repo desks at banks become solely “funding desks.”

2. Customers could set up automatic fund-ing relationships with a bank or their prime broker. Here, the bank agrees to fund all of the customer’s positions at a pre-negotiated spread. The bank looks at all the revenue generated in all products from the customer, making the financing tied to overall business profitability.

3. Customers may be forced to hunt around the Street for banks with offsetting posi-tions. Remember, banks no longer make markets for customers so if customer is short 10 year notes, for example, they must look for a bank that is specifically long the security and hasn’t yet loaned it into the market.

4. There will be more end-user customers joining central clearing counterparties like Fixed Income Clearing Corp, LCH. Clearnet, and Options Clearing Corp (OCC).

5. There will be more repo trading between end-user customers directly with other end-user customers.

“The FOMC minutes released last week indicate that the Fed may overhaul its monetary policy benchmark rate – the federal funds rate. A Repo rate is clearly better than the fed funds rate. There’s been a decline in fed funds volume over the years for a reason. It’s just not as important anymore. The Repo market is a $4.5 trillion a day market and represents funding rates in both the banking system and ‘the shadow bank-ing system’ – the entire financial system. But that all changed last week with the release of the FOMC minutes. It appears Repo is no longer in the running.”

– Scott E.D. Skyrm July 17, 2014

24

Alternative Investment ProductsICD’s Corporate Treasury Investment Guide summarizes

the various available investment options in the market

and assesses them based on preservation of capital, li-

quidity and yield in today’s global economic environment.

In considering the available investment options, corpo-

rate treasury should look to design the optimal portfolio

that meets their investment objectives and risk tolerance.

This requires all prospective investments to be evaluated

through an exposure analytics process to understand the

portfolio’s aggregated counterparty risks.

ICD Intelligencer:

BANKINGON BASEL III

CAPITAL PRESERVATION

HIGH

MEDIUM

LOW

HIGH

MEDIUM

LOW

LIQUIDITY

HIGH

MEDIUM

LOW

YIELD

With corporate cash investment portfolios becoming more di-

verse and more complex with less traditional product supply,

practitioners will be required to master treasury risk management

disciplines to more deeply evaluate alternative asset classes, fund

families, fund managers, counterparties, and country exposure.

The integration of ERP systems, treasury work stations, banks and

fund trading portals with risk management platforms have be-

come a treasury department operational necessity.

As treasury professionals better understand their counterpar-

ty concentration, they must also evaluate the relative financial

strength of their counterparties, which is best performed using

leading indicator metrics. The best way to evaluate and monitor

one’s entire investment portfolio is by harnessing and aggregat-

ing these exposure analytic capabilities and incorporating them

deeper into the daily treasury operational processes. Risk man-

agement has become a core treasury function. It has become im-

possible to function without it and broader corporate intelligence

requires new methods for sharing treasury intelligence and hav-

ing methodologies in place to act on it.

UNINSURED BANK DEPOSITS Capital Preservation good, however with over 400 bank failures since 2008 there is some principal risk. Liquidity high except in the event of counterparty failure. Yield extremely low.

CAPITAL PRESERVATION LIQUIDITY YIELD

FDIC INSURED BROKERED CDS Capital Preservation excellent, assuming CDs are held to maturity, as principal is backed by the United States Government. Liquidity available, but subject to market demand. Yield good for govern-ment-backed investments.

CAPITAL PRESERVATION LIQUIDITY YIELD

TREASURY INSTITUTIONAL MMFS Capital Preservation excellent as securities are direct obligations of the United States Government. Same day Liquidity. Yield extremely low.

CAPITAL PRESERVATION LIQUIDITY YIELD

GOVERNMENT INSTITUTIONAL MMFS Capital Preservation very good as securities are backed by the United States Government and/or Government Agencies. Same day Liquidity. Yield extremely low.

CAPITAL PRESERVATION LIQUIDITY YIELD

PRIME AAA INSTITUTIONAL MMFS Capital Preservation very good based on diversification and 40+ year MMF history. Same day Liquidity. Yield low.

CAPITAL PRESERVATION LIQUIDITY YIELD

GENERAL PURPOSE PRIME INSTITUTIONAL MMFs Capital Preservation very good based on diversification and 40+ year MMF history. Same day Liquidity. Yield low.

CAPITAL PRESERVATION LIQUIDITY YIELD

DIRECT INVESTMENTS This option requires internal investment expertise and resources. Capital Preservation, Liquidity and Yield vary.

CAPITAL PRESERVATION LIQUIDITY YIELD

CAPITAL PRESERVATION LIQUIDITY YIELDGOVERNMENT ULTRA SHORT BOND FUNDS Capital Preservation good as securities are backed by the United States Government and/or Government Agencies, but can be sensi-tive to interest rates. While not designed vfor heavy trading, these products provide next day Liquidity. Yield good in general and excellent for a government-backed investment.

PRIME ULTRA SHORT BOND FUNDS Capital Preservation good based on diversification but can be sen-sitive to interest rates and credit risk. While not designed for heavy trading, these products provide next day Liquidity. Yield excellent.

CAPITAL PRESERVATION LIQUIDITY YIELD

GOVERNMENT SEPARATELY MANAGED ACCOUNTS In general, Capital Preservation good as securities are backed by the United States Government and/or Government Agencies, but can be sensitive to interest rates. Liquidity low as SMAs are gen-erally designed for a 9-month to 2-year time horizon. Yield good in general and excellent for a government-backed investment.

CAPITAL PRESERVATION LIQUIDITY YIELD

PRIME SEPARATELY MANAGED ACCOUNTS In general, Capital Preservation good based on diversification but can be sensitive to interest rates and credit risk. Liquidity low as SMAs are generally designed for a 9-month to 2-year time horizon. Yield excellent.

CAPITAL PRESERVATION LIQUIDITY YIELD

25

26

ICD Intelligencer:

BANKINGON BASEL III

Be PreparedSo what does Basel III mean for corporate treasury?

Basel III brings changes, complexity and challenges to the

banking system that will also impose changes, complex-

ities and challenges to corporate treasury systems and

strategies. Treasury departments have to mature quickly

as they are now expected to become technology centers

and intelligence hubs for their corporations. Treasury tech-

nology is not a modernizing luxury – it is a necessity for

survival and growth. Technology not only streamlines and

automates treasury processes, it expands the categories of

functionality, decision support, intelligence and forecasting.

Basel III regulations will disincentivize non-operational

bank deposits and may reduce investment supply. This will

lead to corporate treasury widening their asset allocation

of investment portfolios. Corporations will need to update

their investment guidelines to add investment products that

match their risk profile and investment objectives.

Corporate portfolios will be diversified with multiple invest-

ments within several investment product categories. In-

creasing the need for secure and efficient trading, reporting,

and analytics that show a portfolio’s aggregated exposure to

counterparties. Continued importance will be placed on eval-

uating the relative financial strength of counterparties and

ensuring that portfolios comply with investment guidelines.

As yields begin to rise, corporations will look to optimize

returns within their risk and liquidity parameters. All portfolio

and exposure reports should be archived on a secure server

that can be accessed on demand by approved parties.

Coda

The challenges directly ahead for corporate treasury are

many. All of them point to the need for a sound, technologi-

cally advanced and deeply integrated foundation. Treasury

Strategies refers to the new corporate nerve center as Trea-

sury 3.0. ICD has led the marketplace with the development

of benchmark trading portal, risk management and security

technologies and they are purpose-built for rapid integra-

tion to treasury management systems, enterprise resource

planning and banking platforms.

Next generation practitioners will need this more advanced

and integrated treasury capability to navigate through in-

terest rate volatility, Rule 2a-7 reform, new banking regu-

latory challenges, a greater diversification of investment

products and asset classes, compliance resetting while at

the same time automating processes, improving efficiencies

and expanding the overall intelligence of corporate finan-

cial operations.

Basel III is introducing sweeping new bank regulation and

reform. The financial world is counting on the international

banking agencies to make the right regulatory decisions

and proper, prudential adjustments. The good news is that

advanced treasury technologies are here as well. They require

fresh energy and a comprehensive approach from dedi-

cated practitioners and disciplined professionals who are

ready to take command of complex and critically important

treasury operations. The stage is set. Basel III has arrived.

27

ICD Intelligencer:

BANKINGON BASEL III

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