From Australia to Asia
Luckily, Australia’s early stage adoption of Basel III regulations will benefit Asian markets looking for models of best practice as they integrate the new standards into their own operating models.
APRA was the first regulator globally to fully adopt the new rules without a long period of transition. Implementation by MAS, HKMA and other Asian regulators, however, has been staggered over a longer time frame. This means local banks in Asia currently assign different values to deposits from financial institutions relative to Australian banks. That will inevitably change in the near future, as many jurisdictions in Asia seem prepared to apply the Basel standards as formulated.
The biggest differences across markets will be how regulators define HQLA and the liability run-off rates for LCR. To that end, regulators in various Asian jurisdictions are customising their formulas to make sure they reflect the accessible liquid assets and the types of liabilities common in their respective markets.
In recent years banks could get away with paying zero – or at least very low interest – on their cash accounts. That seems poised to change. Asia’s banks will have no choice but to offer new solutions, while Asia’s money managers will be obliged to manage their cash allocations more actively, to extract value from changing bank deposit structures. They will likely also have to diversify cash holdings across a portfolio of highly rated institutions.
The hunt for yield goes on
Of crucial importance to banks’ financial institution clients is the fact that banks will continue to price deposit solutions according to Basel III liquidity and stability benefits. On that basis, it’s now a fact of life that Basel III liquidity requirements create a preference for deposits from retail, SME and non-financial corporate customers. This will squeeze returns on financial institutions’ deposits at a time when yields in many markets are already at historic lows – despite recent rate hikes in the U.S.
Put simply, banks place greater value on retail and non-financial institution corporate deposits because those deposits have greater liquidity and stable funding benefits from a regulatory perspective when compared to deposits from financial institutions and short-term deposits. Traditional at-call deposits from financial institutions can no longer be used to support LCR, which in turn may result in excess cash invested in very short-term financial instruments or cash that is left with central banks at very low yield. Sometimes this cash even has a negative yield - hence these deposits are no longer as attractive to banks.
Even so, new offerings from banks that operate where the rules have already been implemented are giving financial institution treasurers, CIOs and money managers a range of options to find the appropriate balance between liquidity and yield objectives.
In Australia under APRA’s rules, these offerings are designed to meet Basel III LCR and NSFR requirements, making such offerings valuable to the bank, while they also potentially provide more yield to the depositor. The most basic solution is a notice period deposit that achieves superior interest rates to at-call and short-to-medium term deposits during the pre-notice period, and market rates during the notice period. Other bespoke solutions have been developed to suit the needs of money managers who are mandated to invest in highly liquid instruments (<30 days) and for clients that manage money for retail clients.