Implications of Basel III on Your Business
Created by J.P. Morgan Treasury Services
Basel III: What are the changes?
The Basel Committee on Banking Supervision seeks to strengthen capital and liquidity standards for banks.
- Capital Adequacy Provisions are intended to ensure that the financial system will be better placed to face future stress and losses by raising the quality, quantity and international consistency of the capital base.
- Strengthens liquidity standards through the Liquidity Coverage Ratio (LCR), which is intended to guard against a "run" on a bank's wholesale liabilities over 30 days of acute market stress.
- Net Stable Funding Ratio (NSFR) tries to encourage resiliency by creating additional incentives for banks to fund their activities with more stable sources of funding. It also encourages banks to push more funding out of the money markets and into tenors one year or longer. The NSFR will not be introduced until 2018, unlike the LCR, which will begin in 2015.
- The proposed calculation for leverage ratio requires a 100 percent credit conversion factor to certain off-balance sheet items, including standby letters of credit (LC) and trade LC.
- In calculating the liquidity coverage ratio, the current proposal provides regulators with discretion to include a percentage amount of "cash outflow" associated with LC. This represents a heavier burden for trade financing, especially when considering that letters of credit are event driven (and therefore outflows are a rare occurrence).
- Pay and taxation issues are largely deferred to individual countries.
- The U.K. and EU will have a new supervisory framework proposed to adopt Basel III.
Who would be impacted by Basel III and how?
Spread over the next few years, these proposed changes may increase your deposit yield if banks reward for committing nonoperating cash to longer-term investments. Conversely, it may result in a higher cost of borrowing for corporates as a result of banks' increased capital and compliance requirements. In addition, Basel III may increase capital and liquidity requirements for trade instruments, which in turn increases costs for banks. Banks may pass cost increases to corporate clients.
What can you do?
Given the importance of funding and risk management, our advisory solutions team can help you reassess your working capital structure to optimize short-term and long-term funding in your business. Because banks are seeking the stability required by the Net Stable Funding Ratio through term deposits, you should consider how such deposits fit in with your working capital strategy. Concurrently, consider your key credit banks for transaction services and if it makes sense for you to consolidate your treasury operations and banking relationships to optimize return.
To learn more about how Chase's solutions can help you,
please contact us or call your Commercial Banker.