BASEL III
New Rules, New Game
Daniel L. Blumen, CTP
Partner, Treasury Alliance Group LLC
©2015 – Treasury Alliance Group LLC – All Rights Reserved
New Rules, New Game
•  Basel III, the BCBS response to the financial crash
of 2008
–  Builds on systemic risk reduction efforts of Basel I and II
–  Adds liquidity and leverage standards to capital adequacy
•  Directly affects banks, the banks will shift the impact
to key treasury services such as:
–  Cash pooling and concentration
–  Short term funding and investment
•  The effect is magnified for global treasuries because
of the G-SIB designation of large providers
–  Will be felt unevenly due to varying bucket assessments
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 1
Today’s Session
• 
• 
• 
• 
New rules
New game
Taking action
Questions and discussions
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 2
NEW RULES
©2015 – Treasury Alliance Group LLC – All Rights Reserved
The Basel Accords
Accord
Lever 1 – Capital
Basel I
Published: 1988
Basel II
Published: 2004
• 
• 
Capital
• 
• 
More capital
Flat rate 8% of exposure
8% of Risk Weighted
Assets
• 
• 
Rules across international banks
• 
• 
Risk differentiation – more capital for higher risk
Lever 1 - Capital
Basel III
More and better capital
Published: 2010-13
• 
• 
Minimum Capital
Standards (2013-2019)
Basel III strengthens
capital adequacy in all
three components –
capital resources, risk
weighted assets and
capital ratios
Minimum base of own funds in every bank
Added operational risk, besides credit and market
Lever 2 - Liquidity
Lever 3 - Leverage
• 
More liquidity/better
long term funding
• 
Prevents excessive
build up of leverage
• 
Liquidity Coverage
Ratio (2015-2019)
• 
Leverage Ratio
(2018)
• 
Net Stable Funding
Ratio (2018)
• 
• 
Basel III introduces a
regime that promotes
resilience to liquidity
shocks
Basel III introduces a
regime that constrains
leverage in the
banking sector and
mitigates model risk
through non risk based
measures
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 4
Lever 1 - Capital
Minimum Risk Based Capital Ratio: 8%
•  Common Equity Tier 1: 4.5%
•  Minimum Tier 1 Capital ratio: 6%
Additional Capital Requirements
•  Capital Conservation Buffer: >2.5%
•  Countercyclical Buffer: 0%-2.5%
•  G-SIB Surcharge: 1% - 2.5%
Total Potential Capital Requirement: 15.5%
…or higher
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 5
Levers 2 and 3
•  Lever 2 - Liquidity
–  Liquidity coverage ratio (LCR)
•  Stock of high quality liquid assets divided by net cash outflows over a 30 day
time period
–  Net stable funding ratio (NSFR)
•  Available amount of stable funding divided by required amount of stable
funding, must be at least 100%
•  Lever 3 – Leverage
–  Leverage ratio
•  Qualifying tier 1 capital divided by total assets plus off balance sheet items,
must be at least 3%
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 6
Global Systemically Important Banks
November 2014
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 7
NEW GAME
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Product View of the Balance Sheet
•  Higher equity translates
to higher cost of credit
products
•  Specific liquidity
requirements translate
to new pricing of
depository services
•  Leverage requirements
translate to new pricing
of other services
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 9
Liquidity Management – Deposits
•  Client value to bank
– 
– 
– 
– 
Operational deposits under 30 days
Deposits over 30 days
Non-operational deposits under 30 days
Potential threat to hub and spoke cash management structures
•  Impact on liquidity management products
–  Gross values of pooling participant accounts may be required
–  Potential universal requirement for cross-guarantees in pooling
structures
–  Impact on use of indigenous/global bank model is unclear
–  Unknown impact on global banks leveraging priority or strategic
banking partners
–  Too early to answer many of these questions
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 10
Liquidity Management – Borrowing
•  Costs will change
–  More direct link between risk rating and cost
–  Long term lending will become more challenging given
need for stable deposits
•  Capital and liability requirements will reduce
ability to create assets (loans) l
•  Overdraft finance will become more expensive
•  Backup/undrawn lines will become more
expensive
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 11
Risk Management
•  Hedging and the credit value adjustment (CVA)
–  The CVA is the difference between the value of a derivative
assuming the counterparty is default risk-free and the value of a
derivative reflecting the default risk of the counterparty
–  The US interpretation of CVA differs from the EU interpretation of
CVA
–  Hedging costs will change and vary by domicile of contract
•  Basel III piles onto EMIR and Dodd Frank for OTC
derivatives
–  Highly complex in terms of calculations and interactions
–  Net result is that OTC derivatives will cost more
•  Basel III impact
–  Risk matters more
–  New calculations apply
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 12
Trade Finance
•  Trade finance instruments (LCs and BAs)have not
been a source of leverage for banks
–  Risk profile is much lower
–  Fully collateralized
–  Lower leverage and run-off requirements
•  Basel III treats trade finance products as regular
loans
–  Will be included in calculating a bank’s leverage ratio
–  Will also impact liquidity ratios but level of impact is still unclear
•  Trade finance instruments will incur higher capital
and funding costs
–  May have a negative impact on trade for developing countries as
indigenous banks could pull back
–  Non-bank products may become an alternative
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 13
Relationship Management
•  Compliance costs
–  Diminish as a share of total revenue for large relationships
•  Type and usage of bank products and services
–  Retailers using multiple collection banks may experience higher costs,
incentive for electronic payments
–  Credit facilities will be sized more carefully and monitored by both
sides
–  Credit ratings of bank and client will matter more
•  Total relationship matters
–  Banks incented to focus on fewer, lower risk and more profitable
customers
–  Poorly performing relationships are at risk given regulatory focus on
capital
–  Treasury management business will become even more valuable for
banks
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 14
TAKING ACTION
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Four Steps
1) Impact
Assessment
4) Banking
Continuity Plan
Basel III
Readiness
2) Counterparty
Review
3) RAROC Analysis
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 16
Impact Assessment
Validate credit rating
Use rating agencies or
banks, validate
assumptions and input
Ensure visibility of all
corporate liquidity
Leverage TMS, bank
portals and field
accountants
Assess transaction
flows
Include transactions by
entity, currency, type
and bank
Determine liquidity
requirements
Funding needs for short
and medium term,
same for deposits and
investments
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 17
Counterparty Review
Identify counterparty
exposure
Include banks, other
financial institutions,
customers and
suppliers
Validate compliance
with internal policies
Bank ratings, customer
concentration,
investment instruments
Review and update
Formal process to
ensure continued
accuracy and
appropriateness
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 18
RAROC Analysis
•  RAROC = Risk Adjusted Return On Capital
•  Developed as a profitability tool for banks
–  Includes all elements of the relationship, not just those managed
by treasury
–  Assigns risk rating to each of these elements
–  Compares total risk to total return
•  The formula: risk adjusted return divided by riskadjusted capital required for the return
–  Accounts for the capital needed to support relationship
•  Used in one form or another by virtually all
banks
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 19
Banking Continuity Plan
Bank Selection
Who can do it, who do
you want, do they want
you
Banking Activities
Critical, core and
desirable
Non-bank Partners
Systems vendors, third
party applications,
consultants
If/Then Analysis
Planned actions under
various scenarios
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 20
Key Lessons
•  Basel III is aimed at financial institutions
–  Will have follow on impact for corporates
–  Exact nature is still unclear but EU/US divergence shows the
potential for adventure
•  There will be confusion
•  Basic housekeeping
–  Develop accurate picture of current treasury management practices
–  Eliminate unnecessary excess lines, OD protections and hedging
operations
–  Communicate your intentions and needs to counterparties
–  Perform bank spend analysis
•  Further action
–  RAROC analysis
–  Banking continuity plan
©2015 – Treasury Alliance Group LLC – All Rights Reserved
Page 21