Heads-up to the futures and securities industry: Basel III could change the way you bank

By Scott Mier, SVP, Commercial Banking

New liquidity rules prompted by Basel III, the regulatory framework crafted in response to the 2008 financial crisis, could increase banking costs for institutional investment firms, including hedge fund managers, asset managers, registered investment advisors, broker-dealers, futures commission merchants, trading firms and securities firms. Knowing about the Basel III Liquidity Coverage Ratio, and how banks are responding to the new rules, can help firms better plan for the banking services they need now and in the future.

Impact of Basel III
Basel III was designed, in part, to ensure that institutional clients’ deposits do not adversely affect banks, should they face high volatility or unusual cash flow events during a future economic crisis. The new regulations are a direct response to the economic collapse of 2008 and the ensuing passage of the Dodd-Frank Act, which seeks to shore up any potential weaknesses in the United States’ financial system. Basel III seeks to mitigate fallout, should such institutions suffer catastrophic failure that could lead to further economic distress.

When the Federal Reserve incorporated Basel III into its own final rule, issued in 2013, it distinguished how it would apply to different banks, based on assets. According to Treasury Management International, the rule differentiates between operational and non-operational deposits. Operational deposits are accounts typically used for daily working cash and payment-clearing activities. Non-operational deposits are typically larger balances and have minimal fluctuation as they are not needed for day-to-day firm operations. Examples include customer segregated accounts for futures commission merchants or broker-dealers and liquidity reserves held by hedge funds.

Financial institutions holding $50 billion or more in assets make up 70.3% of the total FDIC-insured institutional assets as of March 31, 2015. Due to the fact that these financial institutions represent less than 1.00% of the firms covered by the FDIC, regulators want to make sure banks falling into this threshold have the proper amount of capital in the event a significant number of non-operational deposit accounts are withdrawn at the same time. As a result, Basel III specifically requires banks with more than $50 billion in assets to:

  • Hold a capital buffer against 25% of all operational balances
  • Hold additional capital against 40% (down from 70%) of all non-operational balances

Banks with less than $50 billion in assets do not need to meet these requirements. To account for these changes, certain banks are developing new cost structures for institutional deposit accounts.

Over the past nine months at least two of the nation’s largest banks have sent communications to their clients trying to persuade them to move their deposits to non-affiliated banks that do not need to meet the same liquidity requirements. Some banks have communicated significant increases in the fees they will charge to hold these accounts.

Opportunity for better cash management
The new liquidity rules have placed growing pressure on firms, as they look to avoid higher bank fees which can negatively impact their bottom line. Many companies are working with their banker to clearly understand the regulatory definition of operational and non-operational deposits and structure them accordingly, while others are considering it a prime opportunity to seek a new banking relationship. For companies that have grown accustomed to decades-long relationships with a bank affected by the new regulations, it can be difficult to switch. However, by taking a more holistic approach to banking, firms can enhance their cash management and achieve a better value overall from their financial institution.

When seeking a new banking partner that has less than $50 billion in assets, finding a mutually beneficial relationship is key. The bank should be able to fully support a firm’s financial needs, while providing cost-effective accounts and services. Beyond offering deposit accounts and effective treasury management/online banking, a banking partner should be one that:

  • Is well-established in a centralized region near the exchanges with which the firm does business
  • Has a dedicated group that understands the firm’s unique needs
  • Has a deep understanding of the requirements for SEC, CFTC and FINRA-regulated organizations
  • Demonstrates a long track record of successfully providing banking services to firms in the same industry
  • Is able to provide full service offerings, including International Banking, Capital Markets, and Custody Services

Thoroughly evaluating potential banking partners will be vital for firms as they navigate the post-Basel III banking landscape.

For more information on how your firm can navigate these changes, contact an MB Financial Bank relationship manager who specializes in serving companies in the futures and securities industry.