Basel III liquidity rules shaking up the corporate deposit market

Corporates have huge cash reserves, and banks are on the hunt for stable sources of funding. That combination has been a shot in the arm for the sleepy corporate deposit market, and a chance for treasurers to earn better yields than they are used to. By Michael Watt

It didn't take long for product design to catch up with Basel III. The rules were only finalised in December last year, but have already resulted in a new form of deposit being marketed to corporates. It ties customers into deposits lasting a year or more, while giving them an option to withdraw their cash at 35 days’ notice – meaning the funds aren’t caught by the 30-day maturity threshold written into the first of Basel’s two liquidity measures, the liquidity coverage ratio (LCR). Regulators say they’ll be keeping an eye on the growth of this market.

But it is the second of Basel’s liquidity measures – the net stable funding ratio (NSFR) – that is doing most to shake up the corporate deposit market, with some banks estimating that up to 40% of the funds required to meet the ratio could come from corporate cash reserves, a figure that could represent tens of billions of euros of funding for an individual institution. This is sparking fierce competition between banks, while also turning the usual conversation they have with corporate customers on its head.

“It is a bit strange for banks,” says Jean-Philippe Castellani, a managing director in the interest rate and foreign exchange derivatives sales team at Société Générale Corporate and Investment Banking (SG CIB) in London. “When we meet a corporate client, to which we are lending money, we typically discuss liability risk management. However, over the past year, we have often been meeting them to ask for a share of their cash deposits.”

Corporates currently have plenty of cash, as a result of a focus by rating agencies on liquidity and funding risks, which has seen them pressing issuers to keep bigger liquid reserves. The amount of liquidity held by European corporates has increased from a combined total of €300 billion three years ago to around €500 billion today, according to research by Barclays Capital.

“After the liquidity shocks of the crisis – and in the current uncertain environment – corporates should have a cash reserve, in order to deal with market volatility and ensure enough flexibility to the business,” says Enrico Zecchini, senior vice-president of treasury at car-maker Fiat in Turin. According to the company’s half-year results, Fiat has a cash pile of €19.2 billion – Zecchini says more than half is deposited with 30-plus US and European banks. Similar sums have been stockpiled by blue-chip names in a range of sectors (see table A).

The LCR means a €250 million deposit with a term of over 30 days has exactly the same liquidity value for the bank as an overnight deposit of €1 billion

These cash reservoirs are a potentially valuable funding source for banks, but they need to be tapped in ways that will be treated favourably by the incoming Basel rules. The first of the two liquidity measures to be implemented will be the LCR, which requires banks to hold enough high-quality liquid assets – typically government bonds and high-quality corporate debt – to cover expected net outflows during a 30-day period of stress. In other words, holding a lot of liabilities with high run-off expectations will force banks to hold more low-yielding liquid assets, while more reliable funds give banks more freedom.

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Basel III liquidity rules shaking up the corporate deposit market