assessing the impact of financial industry reform€¦ · assessing the impact of financial...
Post on 21-Jul-2020
0 Views
Preview:
TRANSCRIPT
Assessing the Impact of Financial Industry Reform
Carolinas Cash Adventure
Jeff Avers
Treasury & Payment Solutions
Liquidity Strategy & Consulting
May 22, 2012
2
Overview of Today‟s Financial Reform Discussion
Financial Reform is complicated, widespread and painful
It will have a financial impact on both banks and their clients
It will have (and already has had) an impact on corporate and
institutional liquidity management practices
3
Regulatory Reform: “Strengthened but not Simplified”
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
4
Regulatory Impact – A Sampling Dodd-Frank – 400 new rules, requires banks to do 92 new studies and issue 44 periodic reports
Only 33% of rules due by May 1, 2012 were finalized
- Regulation Q repealed – banks can begin to pay interest on
commercial checking deposits
- FDIC mandates unlimited deposit insurance on all
checking/transaction accounts
- FDIC insurance coverage permanently raised from
$100,000 to $250,000
• Should increase the number and total balances of CD‟s
between $100,000 and $250,000
- FDIC deposit assessment changed from being based on
quarterly ledger deposits to being based on consolidated assets
minus average tangible equity
SEC Money Market Fund Rule 2a-7 changed to reduce
shareholder/investor investment risk
• Shortened WAM, increased credit quality and overnight liquidity
• Will likely lower the relative yield on a permanent basis
• Possible requirement that money market funds
1. Maintain a capital buffer in order to serve as the first point of loss
absorption to the extent required,
2. Convert from $1.00 NAV to a Variable NAV, and
3. Restrict redemptions so that up to 10% of a redemption is held
back for up to 30-days
Published by Wall Street Journal ; December 5, 2011
0%
20%
40%
60%
80%
100%
Require Capital Buffers
Eliminate $1 NAV Restrict Redemptions
Percent of Corporate Treasurers that would Reduce or Eliminate Their Money Fund
Investments Based on Proposed SEC Changes
Source: Treasury Strategies 2012 Survey of Corporate Treasurers
5
Regulatory Impact – A Sampling Basel III:
• Requires new standards for Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio
• LCR will only consider “free” or “unencumbered” securities” to be liquid
• Repo collateral and government deposit collateral are not unencumbered
• Deposit runoff assumptions exceed those realized in 2008-9
• Consumer vs. Wholesale and single-product vs. multi-product relationships have differing runoff
assumptions
• New capital requirements will likely increase loan pricing and may limit banks ability to lend to certain clients
• Total Capital remains at 8% with discussion about raising it to 10%*
• Tier 1 Capital is raised from 4% under Basel II to 6% by 2015 under Basel III*
• Minimum common equity raised from 2% under Basel II to 4.5% by 2015 under Basel III*
• Increased capital requirements plus basing FDIC on assets will drive some lending to „non-banks‟
Basel III Capital Framework All numbers are percentages
Common
Equity Tier 1
Capital Total
Capital
Minimum 4.5 6 8
Conservation Buffer 2.5 2.5 2.5
Minimum Plus Buffer 7 8.5 10.5
* The Basel III capital minimums include an additional 2.5% “buffer.”. A bank must meet the minimum plus the
buffer in order to be fully eligible to pay shareholder dividends, as well as pay discretionary bonuses to employees.
Capital Requirement Milestones
2013 Minimum capital requirements: Start of the gradual phasing-in of the higher minimum capital requirements.
2015 Minimum capital requirements: Higher minimum capital requirements are fully implemented.
2016 Conservation buffer: Start of the gradual phasing-in of the conservation buffer.
2019 Conservation buffer: The conservation buffer is fully implemented.
6
Financial Impact – A Sampling
Higher interest expense on deposits
Reduced Revenue Streams
Volcker Rule
Potential divestitures
Reduced Fee Income
NSF/Overdrafts (Regulation E)
Debit Interchange (Durbin Amendment)
Revamped marketing collateral
Increased Fees
Uncollateralized daylight overdrafts
FDIC
Client communication costs
Development costs for new products
Employee training
Reduced value of deposits (“FTP”)
Increased cost of compliance & oversight
Human, Systems, tracking and reporting
Increased emphasis on eliminating marginally
profitable and unprofitable relationships
Increased Bank Expenses Increased Customer Expenses
Discontinuation of „Free Checking‟
7
Summary: New Regulations Could Drive $1.5T
onto Bank Balance Sheets
When interest rates rise, we could see an additional $1.5 trillion flow back onto bank balance sheets.
• In other post and non-Reg Q countries, companies can hold as much as 50 - 70% of total liquidity in bank
deposits.
• Two current regulations could potentially drive even more liquidity back into the banking system - changes to
2a-7 regulations and collateral requirements for derivatives trading.
Unless loan demand also increases, bank balance sheets will be further constrained to accommodate these deposits.
• Interesting note: Barclays Capital estimates that banks are short $1.7 trillion in core stable funding under the
proposed new Basel III requirements.
In U.S., 25% of
Corporate
Liquidity = $1.3T
0%
10%
20%
30%
40%
50%
60%
70%
80%
U.S. France UK
Reg Q Post Reg Q No Reg Q
Percentage of Total Corporate Liquidity Held in Bank Deposits
Source: Treasury Strategies‟
proprietary research; Commercial
Deposit/Sweep Study & Global
Corporate Liquidity Research
Bank Deposits Defined as:
• DDA/Current Accounts
• Offshore Deposits
• Time Deposits/CDs
• Savings/MMDAs
• Sweep Accounts
This is a positive
outcome for U.S.
banks only if loan
demand catches up
to deposit growth
8 8
Market Rates for Cash Investment Instruments
Alternative Cash Investment Options
• Rates obtained from (1) WSJ Money
Rates, (2) Crane Data (money funds) and
(3) State-specific LGIPs
SunTrust Sweep Yields
As of September 30, 2011
Master Note 35/20 bps
Repo 3 bps
Eurodollar 10 bps
Federated Prime
Fund
4 bps
Federated
Treasury Fund
1 bps
Overall market rates have
contracted dramatically
since July 2010
• Versus July 2010: overnight,
30-day and 90-day yields are
down across the board
• 1-month and 3-month
Treasuries are yielding 0.08%
and 0.095% respectively
• Money Market Mutual Fund
yields continue to be anemic
• Most money market
instruments are currently in the
top half of their 52 week High-
Low range
Short-term Investment Instrument Rate as of
7/19/2010*
Rate as of
2/14/2011*
Rates as of
5/4/2012*
52-Week*
Overnight Instruments Low High
Fed Funds 20 bps 15 bps 18 bps 5bps 18 bps
Repo 25 bps 14 bps 18 bps 2 bps 33 bps
SunTrust ECR (Analyzed Business Checking) 35 bps 35 bps 25 bps 25 bps 35 bps
SunTrust ECR/Rate Paid (Analyzed Interest Checking) 25/5 bps 25/5 bps 25/5 bps
30-Day Instruments 5/4/2012* Low High
Treasuries 15 bps 13.5 bps 8 bps 0 bps 11 bps
Commercial Paper 29 bps 25 bps 11 bps 3 bps 13 bps
Eurodollars 25 bps 25 bps 12 bps 14 bps 30 bps
Libor 33.8 bps 26.5 bps 24 bps 18.5 bps 29.6 bps
SunTrust Money Market Account Rate 25 bps 25 bps 15 bps
90-Day Instruments 7/19/2010 2/14/2011 5/4/2012* Low High
Treasuries 15 bps 13 bps 9.5 bps 0.5 bps 11.5 bps
Commercial Paper 42 bps 30 bps 15 bps 12 bps 20 bps
Libor 51.25 bps 31.4 bps 47 bps 24 bps 58 bps
Eurodollars 45 bps 30 bps 20 bps 20 bps 38 bps
AAA-Rated Taxable Money Funds: 7-day Yield as of 6/30/2010 1/31/2011 4/30/2012 Low High
Crane Treasury Institutional MF Index 1 bps 1 bps 1 bps 1 bps 1 bps
Crane AAA Prime Institutional MF Index 12 bps 10 bps 9 bps 7 bps 10 bps
Local Government Investment Pools: Monthly Yield as of: July 31 Feb 28 April 30 Low High
Georgia Fund 1 LGIP (Monthly yield) 21 bps 17 bps 14 bps 9 bps 14 bps
Florida Prime LGIP (Monthly yield) 39 bps 27 bps 33 bps 21 bps 33 bps
9 Data Source: Treasury Strategies Corporate Liquidity Study www.TreasuryStrategies.com
January Fed Funds Rate 1999 - 2006
5%
5%
1%
2%1999
Corporate Liquidity
by Instrument
Notes/ Bonds
13%
CP/ Repo/ CD
45%
Other
32%
MM Mut Funds
10%
2005
Corporate Liquidity
by Instrument
MM Mut Funds
21%
Notes/ Bonds
29%CP/ Repo/ CD
24%
Other
26%
2006
Corporate Liquidity
by Instrument
MM Mut Funds
27%
Notes/ Bonds
23%
CP/ Repo/ CD
25%
Other
25%
Market Overview
Investment Instruments Change with Interest Rates
As interest rates fluctuate throughout the economic cycle, the specific types of
investment instruments used by corporate cash investors also changes.
2004
Corporate Liquidity
by Instrument
Notes/ Bonds
21%
CP/ Repo/ CD
15%
Other
28%
MM Mut Funds
36%
2005:
The last rising rate 2-3%
Fed Funds market
10
Percent of Cash Portfolio Held in Various Products
Products 2005 (The last rising rate 2-3% FF
Market)
Current
Portfolio
2014 (FF expected to
reach 2% by
year-end)
2015 (The next rising
rate 2-3% FF
Market)
Market Large Client Large Client Large Client Large Client
Non-interest Analyzed DDA (ECR)-
New Interest bearing Checking
4% 15.0% 15.0%
Sweep 4% 14.6% 8.3% 5.0% 5.0%
Interest Bearing DDA --
Hybrid DDA (Pays ECR + Interest) --
Money Market Mutual Funds 21% 20.0% 20.0% 20.0%
Bank Money Market/Savings Products 2%
Commercial Paper/Repo/CD 24% 46.3% 20.0% 10.0% 10.0%
Commercial Paper
Repo
Bank CD
Notes/Bonds 29%
US Treasuries
US Government Agencies 0.7%
Corporate/FI/Muni Notes & Bonds
Short-term Fixed-Income/Bond Funds 3% 11.3% 40.0% 40.0% 40.0%
Asset/Mortgage Backed Securities 2%
Other Investment Instruments
(Eurodollar Deposits, Auction Rates,
Foreign Securities, Derivatives, etc.)
11% 27.8% 11.0% 10.0% 10.0%
Total 100% 100.0% 100.0% 100.0% 100.0%
11
Percent of Cash Portfolio Held in Various Products
Products 2005 (The last rising rate 2-3% FF
Market)
Current
Portfolio
2014 (FF expected to
reach 2% by
year-end)
2015 (The next rising
rate 2-3% FF
Market)
Market Large NFP Large NFP Large NFP Large NFP
Non-interest Analyzed DDA (ECR) 4%
Sweep 4% 10% 10% 11% 11%
Interest Bearing DDA --
Hybrid DDA (Pays ECR + Interest) -- 4% 4%
Money Market Mutual Funds 21% 20% 20% 15% 15%
Bank Money Market/Savings Products 2%
Commercial Paper/Repo/CD 24%
Commercial Paper
Repo
Bank CD
Notes/Bonds 29% 60% 60%
US Treasuries 35% 25%
US Government Agencies 35% 25%
Corporate/FI/Muni Notes & Bonds 20%
Short-term Fixed-Income/Bond Funds 3% 10% 10%
Asset/Mortgage Backed Securities 2%
Other Investment Instruments
(Eurodollar Deposits, Auction Rates,
Foreign Securities, Derivatives, etc.)
11%
Total 100% 100% 100% 100% 100%
12
Percent of Cash Portfolio Held in Various Products
Products 2005 (The last rising rate 2-3% FF
Market)
Current
Portfolio
2014 (FF expected to
reach 2% by
year-end)
2015 (The next rising
rate 2-3% FF
Market)
Market Mid-Size
Client
Mid-Size
Client
Mid-Size
Client
Mid-Size
Client
Non-interest Analyzed DDA (ECR) 4% 48% 10%
Sweep 4% 100%
Interest Bearing DDA -- 10% 10%
Hybrid DDA (Pays ECR + Interest) --
Money Market Mutual Funds 21% 30% 80% 90%
Bank Money Market/Savings Products 2%
Commercial Paper/Repo/CD 24%
Commercial Paper
Repo
Bank CD
Notes/Bonds 29%
US Treasuries 22%
US Government Agencies
Corporate/FI/Muni Notes & Bonds
Short-term Fixed-Income/Bond Funds 3%
Asset/Mortgage Backed Securities 2%
Other Investment Instruments
(Eurodollar Deposits, Auction Rates,
Foreign Securities, Derivatives, etc.)
11%
Total 100% 100% 100% 100% 100%
13
Summary of Today‟s Discussions
1. Financial reform is complicated, widespread and painful
2. It will have a financial impact on both banks and their clients
3. Financial reform will have an impact on corporate and
institutional liquidity management practices
top related