The early morning breakfast briefing panel on the second full day of the International Payments Summit (IPS) 2013 show at the Hilton London Tower Bridge Hotel on Wednesday 10 April contained a banker who was brave enough to admit that, “yes, prices will rise” for corporate treasurers and other clients under the new Basel III capital and liquidity regulations and the raft of other new post-crash rules facing banks. The compliance burden is also likely to further depress the amount of IT spend available to support technology innovation, reports Neil Ainger.
“Collateral is the universal medicine for everything now it seems, but it has cost implications,” continued the banker at early morning breakfast briefing at the IPS 2013 trade show in London on 10 April. The question is whether these costs will be passed on to consumers, corporate treasurers and others or not, in terms of increased pricing and one member of the breakfast banking panel, speaking under the Chatham House anonymity rules at the 8am morning session, was brave enough to admit it would.
“Banks should charge for intraday services,” he continued, referencing the session title of ‘Managing Liquidity and Intraday Liquidity Risk in Payments’. “How can you manage if you are not aligning cost to margins?”
Whether treasures and others will accept increased bank charging, however, is another matter, admitted the banker before going on to say that corporate clients will naturally re-evaluate whether they should stay with a bank that charges or not. “If there is another bank that isn’t charging then they’ll get the business, but there is still a cost [whether you as the bank swallow it or not].” It is a question of squaring that circle from the banker’s perspective.
Another member of the IPS 2013 breakfast briefing panel disagreed, maintaining that intraday liquidity charging wasn’t on the horizon yet for the reasons given above, while pointing out that the new global financial services structure means counterparty risk is being transferred into intraday risk so clearing might be less attractive to some banks in the future, causing exists, and then a concentration risk as too few clearing banks will remain. This could increase systemic risk for financial services later on down the line.
This concentration risk observation was one that many in the audience of approximately 60 senior financiers, cash management and payments specialists at the IPS 2013 breakfast briefing completely agreed with. The open discussion forum pointed out that all banks will be relying on the same collateral worldwide - mainly government bonds and less and less repo or other private instruments - so they’ll be a lack of diversity in bank portfolios in future, which creates its own risks for treasurers burned by the last crash in 2008 - some of whom are now distrustful of banks - but there is still a core role for them, and increasing systemic concentration risks on the global economy as a whole is never a good idea.
Panel of JPM, BNP and Deutsche Bank Warn About Regulatory Impact
The IPS 2013 panel consisted of Daniel Evans, executive director, global treasury, JP Morgan; Werner D’Haese, risk policies and implementation, asset liability management (ALM) and treasury, BNP Paribas Fortis; and Christian Goerlach, director of cash management FI, global transaction banking (GTB), Deutsche Bank. The moderator, Jerry Norton, head of banking at sponsors CGI Logica, was the man charged with controlling the lively early morning panel session.
A brief history of the Basel III project was provided by one of the bankers, right from its start on 17 December 2009 when the post-crash proposals to strengthen liquidity and capital adequacy requirements at banks were first published, through to the finalised draft in 2010 and the four-year implementation delay and revisions to the Liquidity Coverage Ratio (LCR) announced at the turn of this year. What used to be an allegedly 8% minimum capital requirement with only 2% liquidity required under the old Basel II regime, is now morphing into a minimum 7% Tier 1 capital requirement under Basel III, which will actually be enforced, and more importantly will most likely turn into double figure capital requirements once the systemic risk and countercyclical buffers are added in too - not to mention the extra systemically important financial institution (SIFI) requirements on a small number of massive, globally important banks. All this cost will affect pricing.
One of the other bankers got up and used a flipchart to draw a timeline illustrating the 30 days of stress testing that banks must be able to survive under the LCR rules. The Set Stable Funding Ratio (NFSR) is the other liquidity requirement under Basel III and this is designed to stop another Northern Rock - known as ‘Northern Wreck’ in the UK after its collapse signalling the start of the credit crunch - where banks are too reliant on markets to fund their corporate or consumer loan books and operations. He also listed all the liquidity and capital requirements banks are facing under the raft of new post-crash regulations, citing:
• Buffer 1: The Basel Committee on Banking Supervision (BCBS)-inspired LCR rules under Basel III.
• Buffer 2: BCBS/Committee on Payment and Settlement Systems (CPSS)-inspired intraday reporting requirements.
• Buffer 3: BCBS/International Organization of Securities Commissions (IOSCO)-inspired rules, which are forcing banks to hold collateral for the new over-the-counter (OTC) derivatives trading environment where deals have to be more transparent and go via a central counterparty (CCP) clearinghouse, in accordance with the G20’s wishes.
“This is madness,” he concluded. “Banks are being told they need 35 safety air bags, which is way way too much.”
Another banker on the panel pointed out that the banking sector has also got the new TARGET2-Securities (T2S) single European securities settlement engine to cope with, and that will have liquidity and IT cost impacts too, as will CCP usage, and all the other regulations coming into force. The adverse impact this compliance burden will have on the amount of discretionary IT spend available to support new technology innovation at banks in the coming years is also likely to be considerable.
It is not a litany of complaint that will not garner much sympathy at corporate treasuries or with consumers, but a number of very valid points were made at the IPS breakfast briefing about the impact of the raft of new regulations coming into force - with Dodd-Frank in the US and the Capital Requirements Directive (CRD) IV in Europe implementing the global Basel III stipulations - all likely to mean increased payment and transaction prices in the coming years.