Regulators wary of new corporate deposits that sit outside Basel III LCR

Bank supervisors say they are keeping a close eye on a new generation of corporate deposits that use a rolling 35-day option to remain out of reach of the 30-day threshold embedded in the Basel III liquidity coverage ratio (LCR) – one of the first products designed in response to the new rules.

“From a regulatory and supervisory perspective, we shouldn’t look at banks using these types of products as being anything other than reliant on short-term funding. The 35-day option deposit sits just outside the LCR, and we would want to be looking very closely at how these products influence the overall funding profile of the firm. If the alternative is purely overnight funding, then of course it is an improvement, but it isn’t a perfect situation,” says one senior regulator who is close to the Basel Committee on Banking Supervision.

The LCR requires banks to hold enough liquid assets to cover net outflows during a one-month period of stress, with the Basel III text assigning a range of outflow rates to different types of liabilities. Corporate deposits with maturities under one month are assigned an outflow value of 75%, meaning a bank would need to cover that portion of the funds with low-yielding, liquid assets. However, liabilities with maturities longer than 30 days are assigned no outflow value at all.

Consequently, a number of banks have begun offering deposits containing rolling, embedded put options that allow corporates to withdraw their money at 35-days’ notice – while also offering customers a periodic step-up in the interest paid as an incentive not to exercise that option.

Regulators might not be happy with this innovation, but corporate treasurers are. “For me, as a treasurer, this is a very good and flexible instrument. I can get higher returns if I keep the cash with the bank until the nominal maturity, while at the same time having a window to retrieve it without breakage costs if I want. We are switching a portion of our liquidity to this new instrument if the bank offers it,” says Enrico Zecchini, senior vice-president of treasury at Fiat in Turin.

Société Générale Corporate and Investment Banking (SG CIB) started offering the deposits at the start of this year, and they already take up between 5% and 10% of the bank’s total corporate deposit base. Barclays Capital is also offering the product.

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