An Interview with Paula Stibbe, Head of Global Liquidity Sales, Asia Pacific, at J.P. Morgan Asset Management
New regulations—most notably, Basel III—are compelling many treasurers to recalibrate their liquidity strategies. We spoke with Paula Stibbe, Head of Global Liquidity Sales, Asia Pacific, at J.P. Morgan Asset Management, to discuss the impact of Basel III and the shifting roles of bank deposits and money market funds (MMF) in cash management.
Basel III covers a lot of ground. What does a liquidity investor need to understand about the new regulations?
Basel III regulations redefine global standards for bank capital, liquidity and leverage. Though Basel III will not be fully implemented until 2019, key regulations have taken effect and they’re already having a profound impact on how banks manage their balance sheets. Liquidity investors need to understand how banks treat deposits under the new rules. In this way they can most effectively structure and segment their cash portfolios to gain the greatest benefit from the new regulatory regime.
Liquidity investors need to understand how banks treat deposits under the new rules.
What’s changed in the way banks view deposits?
Deposits characterised as operating cash become more attractive to banks, which may offer improved yields to incentivise these investors. But deposits characterised as non-operating cash become much less attractive to banks under Basel III. Put another way, bank balance sheets are becoming less available to many cash investors.
Which Basel III provision is most important in determining which deposits a bank does, and does not, want on its balance sheet?
It’s the liquidity coverage ratio (LCR), widely described as a game-changer in the way banks view their deposits. The LCR aims to ensure that a bank can meet its liquidity needs in a severe stress scenario. Specifically, the regulation looks to make certain that a bank holds a sufficient stock of unencumbered assets that can be converted into cash within a day, with no decrease in value, to meet all of the bank’s liquidity needs for a 30-day stress scenario. The ratio of high-quality liquid assets (HQLA) to a bank’s expected net cash outflows during this 30-day period must be greater than 100%.
How do banks calculate their expected net cash outflows under Basel III?
A bank looks at its deposits (its liabilities) and makes a judgement about how quickly they could exit the bank. Under the US interpretation of Basel III standards, unsecured wholesale funding from non-financial services corporations would receive a 40% run-off factor. Unsecured wholesale funding from financial services corporations—deposits characterised as non-operating cash—would receive a 100% run-off factor.
Where are treasurers moving the cash that is exiting bank balance sheets?
Treasurers are moving to a range of off-balance sheet investment vehicles, including money market funds and separate accounts.
Treasurers are moving to a range of off-balance sheet investment vehicles, including money market funds and separate accounts. If their investment policies permit it, some liquidity investors will decide to move beyond MMFs into ultra short bond funds or short-term bond funds with investment horizons of, respectively, about six months or one year.
Are banks adding money market funds to their own platforms?
Some are doing that, and we think more will follow suit. Banks are looking to present off-balance sheet alternatives that allow them to remain competitive with end-to-end cash solutions for their clients.[[[PAGE]]]
How might Basel III impact the current yield gap between MMFs and bank deposits?
Although bank deposits have recently outperformed MMFs in terms of yield, we expect that the gap will close and, at some point, MMF yields will outperform. Once the Federal Reserve begins to raise the fed funds rate—we think the first hike will happen this year—yields are expected to rise and the spreads between MMFs and bank deposits could shift.
Do you anticipate any specific changes in Asia-Pacific cash management in the wake of Basel III?
As the liquidity coverage ratio takes effect across the region, we expect to see a growing demand for MMFs. As a result, we think there could be a substantial opportunity for a third-party distribution channel for MMFs, as is well-established in the US, UK and continental Europe.
How can liquidity investors most effectively respond to Basel III?
A cash investor looking to maximise the return on its liquidity portfolio must understand the nuances of Basel III and consider a bank’s likely treatment of its cash balances. We believe that accurately forecasting and segmenting cash will be the most effective approach. When cash pools are segmented by liquidity needs and risk profile, investment opportunities can be fully optimised.
