How To Deal
With the Repeal of Reg Q
Gail Angel, SVP & Division Executive
FIS Commercial Treasury Solutions
Tom Ormseth, SVP Non-Credit Services
Wintrust Financial
Discussion Topics
• Overview of the amendment
• Implications for Bankers
– Product strategy
– To pay or not to pay
– Pay or play
• Implications for Corporate
Treasurers
– New product decisions
– Different ROI models
– Tax & insurance implications
– Information reporting & liquidity
“Treasurers who thought the ambitious Dodd-Frank financial reform bill
would not disrupt routine cash management operations are getting a
wake-up call. While over-the-counter derivatives rules and rating agency
regulation attracted the most attention from treasury pros in the run-up to
the bill’s passage, the repeal of Regulation Q could change how you deal
with overnight account balances … Now banks are free to pay interest on
corporate checking account balances for the first time since the
Depression.”
“With interest-bearing accounts paying 25 basis points or less, permitting
banks to pay interest on checking account balances doesn’t look too
important, but when interest rates move up, the elimination of Reg Q,
combined with FDIC transaction account guarantee programs, will cause
a major competitive dislocation. It could profoundly affect the flow of
capital and the risk profile of banks. “(Tony Carfang, Treasury Strategies)
Treasury & Risk “Reg Q Wipeout” By Richard Gamble, September 2010
management
• Potential scenarios
• Advice & suggestions
Immediate Questions
• Impact of FDIC changes on fees & account analysis statements
• Affect on where cash managers keep corporate funds
• Implications for sweep accounts & money market funds post Reg Q
2
Let’s talk …
Bankers/Vendors:
Corporations:
• Are your clients aware of the pending
• Have any of your banks approached
change and have any approached you
about your plans?
you about their/your plans related to
the pending change?
• How has the ability to pay interest on
• How has the ability to receive interest
commercial demand accounts
factored into your 2011 planning?
– What do you foresee as the likely
impact on your commercial product
strategy?
on commercial demand accounts
factored into your 2011 planning?
– What do you foresee as the likely
impact on your cash management
strategy?
– What impacts do you believe will be
– What impacts do you believe will be
required from your technology
platforms to succeed under the new
rules?
required from your technology
platforms to succeed under the new
rules?
• Do you view this development as an
• Do you view this development as an
opportunity, threat, or nuisance?
opportunity, threat, or nuisance?
3
Overview of the Amendment
•
•
•
•
Repeal of Regulation Q
FDIC changes
Other factors
Misperceptions
Repeal of Regulation Q
• The Banking Act of 1933 (Glass-Steagall)
Commercial DDA Revenue
by Source
depository banks
– Prohibited interest on business checking
accounts (Reg Q)
– Designed spur economy by making bank
deposits less attractive
• Less US corporate liquidity
• Complex suite of cash management services
designed to offset opportunity cost
• Higher % of fee income
– Largely overturned by Gramm-Leach-Bliley
Act in 1999
• Dodd-Frank Act of 2010 - Section 627
% of total - 2008
– Separated investment banks from
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Fees
Net Interest
Income
– Repeals prohibition ON PAYMENT OF
INTEREST ON DEMAND DEPOSITS
– Designed to spur economy by increasing
deposits and fueling lending
– Goes into effect July 21, 2011
McKinsey US Payments Map
5
FDIC Changes
• Dodd-Frank Section 335
– Replaces Transaction Guarantee which expired December 31, 2010
– Makes $250,000 FDIC insurance coverage limit permanent
– Retroactive to January 1, 2008
• Benefits depositors of 13 failed institutions 1/1/08- 10/3/08 including IndyMac and Integrity Bank
• Dodd-Frank Section 343
– Provides unlimited insurance for funds held in non-interest bearing transaction accounts
• Effective December 31, 2010
• Applies to all depository financial institutions
– Participating TAG institutions paid 15 - 25 basis pts on daily average balance > $250,000
– No separate assessment for additional coverage
Capital Adequacy
Asset Quality
Management Earnings
Liquidity
Sensitivity to Mkt Risk
– New FDIC rates 5-35 bps, based on CAMELS rating
• Additional insured funds mean FDIC will need to maintain higher reserves
• Premiums assessed based on assets
– Unlike TAG, will NOT extend to NOW accounts paying < specified rates or IOLTA accounts
• Regulations adopted by the FDIC expected to clarify interplay of provisions
6
Other Factors
• Durbin Amendment
– Limits debit card swipe fees to 7 to 12 cents
• Typically 1.3% previously paid by merchant
• Exempts institutions with assets < $10B
– Gives merchants a choice of debit network s
• Theoretically promotes lower prices for consumers
– Approximately 80% decline … $18B impact
“These reforms will benefit the prudent and constrain
the imprudent … Strong banks, the well managed
financial innovators, will adapt and thrive under the new
rules of the road.” Treasury Secretary Timothy Geithner
“The bill is a 2,300 page legislative monster … that
expands the scope and the powers of ineffective
bureaucracies.” Sen. Richard Shelby (R, AL)
• Title VII - Payment Clearing & Settlement Supervision
– Establishes framework to ensure stability
• Parties that operate or manage multilateral systems for the purpose transferring, clearing, or settling
transactions ("Utilities")
• Financial institutions that participate in the payments, clearing or settlement system ("Participants")
• CFPB – Consumer Finance Protection Board
– Centralize consumer regulatory responsibility of financial products from seven other agencies
– Supervises, examines, and enforces consumer financial protection laws
7
Other Factors
• BASEL III
– Increase in capital ratio requirements
– More stable source of funds (balances with treasury services)
• Federal Reserve Board
– QE2 likely to depress interest rates through 2011
• Pressure on earnings
– Reduced overdraft fees
– Increased fee on uncollateralized daylight overdrafts
• Multiple rulemakings
– Uncertainty
– Hot potato politics
How Interchange Debate Could Be Affected by Tester‘s Reelection Race
American Banker, May 4, 2011
• Others?
“The Montana Democrat (Tester) has been deluged by attack
ads protesting his bill to delay proposed debit interchange fee
restrictions by two years while regulators study their impact.”
8
Misperceptions
Banks HAVE to begin paying
interest
Corporations will be able to
‘double dip’
Sweeps are dead
Interest rates are going to
better than ECR
My bank will take
care of it for me
Everyone’s got it figured out
(but me)
My clients know
what they want
to do
9
Implications for Bankers
• Product strategy
• To pay or not to pay
• Pay or play
10
Product Strategy
Introduce New Products
Revise/Enhance Existing Products
• New account types
• Core applications
– Interest bearing accounts
– Tiered accounts/interest rates
– Hybrid accounts
• ECR balances
• Interest on excess balances
• On-Us sweeps
– From non-interest/ECR accounts
– Into interest bearing account
– Into FDIC extended insurance accounts
• Relationship packages
– Activity and/or balance incentives
– Interest calculations
– Reporting requirements
• Cash concentration
– Value proposition/ROI
• Information reporting & on-line banking
– Reporting requirements
– Incorporate multi-bank data
• Account analysis
– Ability to support new product types
– Fee-based pricing model adjustments
• Sweeps
– Value proposition/ROI
11
Product Strategy
Sample Assessment: FIS Cash Manager
• 110 banks
• 15,000 client accounts
– 53% business accounts
– 45% personal accounts (high net worth)
– 2% other
• $5.9B/day
– $4.7B Off-Balance/Money Market Mutual
funds
– $1.2B On-Balance Sheet Sweeps
• Deploy technology for other applications
– Loan Drawdown/Paybacks
– (New) Extended FDIC Insurance Sweep for
large balance accounts
Sweeps are dead ?
Not yet …
… Already in place
… Automated & convenient
… Bottom line:
Yield needs to offset costs
http://www.imoneynet.com/institution
al-money-funds/index.aspx
12
To Pay or Not to Pay
• Defensive vs. Offensive Stance
– Hold off on paying interest
• May be moot given current low rates
• Analyze potential cost and magnitude
• Monitor competition
Banks HAVE to begin paying
interest ?
– Begin paying interest from day 1
• Protect high balance accounts
• Consolidate/grow deposits
• Competitive pressures
– 70% banks anticipate paying interest1
– Non-traditional entrants able to attract
new deposits
They may NEED to …
… In order to compete
… In order to attract new business
… In order to retain relationships
• Remote deposit capture
• On-line capabilities
• Mobile banking
1McKinsey,
December 2010
13
Pay or Play
Global Concepts
Quick Poll – 4/11
• Profitability
– Cost to develop/enhance products
– Interest expense & impact on Funds
–
•
•
Transfer Pricing
Additional administrative and
regulatory compliance overhead
Increased reserve requirements
Hard dollar fees vs. balance offsets
Cost of conversion vs. new sales
–
–
–
Cannibalization
– Cash Concentration vs. DDA
– Sweeps vs. DDA
– Conversion of ECR accounts/balances
Administrative burdens
– Documentation
– Training
– Ongoing reporting
1
% Banks planning to pass on
FDIC premiums
2 % planning to pay interest
Response
(31 top 100 Banks)
84%
87%
(vs. 71% in July)
3 Interest only &Traditional ECR
7%
Traditional ECR & Hybrid
3%
Traditional ECR, Hybrid &
Interest Only
68%
Undecided
16%
Community Banks Can’t Let Dodd-Frank’s Repeal of
Reg Q Stand – American Banker, March 17, 2011
“elimination of Reg Q will likely move most community banks to
a liability-sensitive position, exposing net interest margins to
loses from higher interest rates just as rates are poised to rise
significantly from their historical lows.”
14
Implications for Corporations
•New product decisions
•Different ROI models
•Tax & insurance implications
•Information reporting & liquidity management
New Product Decisions
• New vs. existing relationships (*)
• Account types
– Status quo
– Interest bearing account
• Not all necessarily equal
– Hybrid accounts
• New services
– Automated concentration
– Sweep to interest bearing account
• US-based account
Corporations will be able to
‘double dip’ ?
Don’t count on it!
... Expect one or the other
Interest rates are going to
better than ECR ?
• FDIC insured up to $250K
• Not subject to foreign sovereign risk or
legally restrictive minimum deposits
– Extended insurance sweeps
• More options, generally better
Probably not ...
... Look for tiered rates
... ECR probably higher
16
Account Type Comparison
Interest
Rate
Insurance
Tax
Deposit
Minimums
Duration
Accessibility
None, but
ECR typically
higher
Unlimited
No
None
Short term
As needed
Basic
Interest
Checking
TBD –
probably
lower than
Sweep
$250K
Yes
None ?
Short term
As needed
Higher
Interest
Commercial
Account
TBD –
possibly
equivalent
to Sweep
$250K
Yes
TBD
Short term
As needed
Hybrid
Account
Probably
lower net
returns
$250K
Yes
None ?
Short term
As needed
Money
Market
Account
As
high/higher
than other
options
Varies
Yes
Yes
Long term
Restricted
ECR Account
17
Different ROI Models
• Business needs
– Operating, reserve, and strategic cash flow requirements
– Balance between risk and return
– Degree of active vs. automated cash management
• Different inflection point
– Sweeps
• On or Off Balance Sheet
• Returns vs. costs (fees and labor)
– Cash Concentration
• Interest bearing deposit accounts
• Investment/debt return vs. hard/soft costs
– Frequency
– Administrative overhead
• ECR vs. Interest ROI
Interest rate
Fixed &
Variable
Costs
– Complicates ‘hard vs. soft dollar question
• Net rate of return
– Tax Implications
18
Tax & Insurance Implications
* No income
* No out of pocket expenses
* ECR not taxable
* Standard account analysis statement
ECR Account
=> What’s easiest to manage?
* Unlimited coverage
=> How much coverage do you need?
* Interest income
* Budgeted expense items
* Interest income taxable
* Need 1099 INT for > $10
Interest Bearing
Account
=> What approach makes most sense?
* $250K Coverage
=> How can you mitigate risk?
19
Information Reporting
& Liquidity Management
• More banks, more complicated
• Not just a large corporate problem
“The organizations that most effectively
weathered the economic crisis were those
with access to timely, accurate and usable
information.”
AITE Trends in Bank-Supported, BusinessInitiated Payments , February 2011
Knowledge = Power
AITE U.S. Large Corporate Treasury Services:
An Industry Positioned for Growth, February 2009
Factors influencing Number of Banks
• Business needs
• Risk mitigation – counterparty and FI-based
– Limiting exposure to any 1 bank
• Wallet sharing
• Operational cost reduction
20
Information Reporting
& Liquidity Management
Best Practice: Leverage Technology to Improve Visibility
Automate wherever possible
• Bank information
– Multi-Bank reporting
– Treasury workstations
– SWIFT
• Internal interfaces
– Customized or standard utilities
– Electronic vs. paper
Routinely explore additional
technology/new services
• SAAS/Cloud-based applications
– Trade networks
– Treasury workstations
• Bank portals
• XML EDI Formats
Technology Solution Adoption
2011
2008
Treasury management system
57%
47%
Bank account management
58%
50%
Netting
26%
21%
Investment portal
39%
13%
FX portal
36%
8%
IDC Financial Insights Preliminary Findings from Technology Trends Surveys, March, 1022
21
Potential Scenarios
• Bank actions
• Interest rate impact
• Economic impact
Bank Actions
• Wait and see
• Monitor and assess
• Enhance existing product lines
Status Quo
• Hope you haven’t noticed
• Focus on deepening relationships
• Enhance and expand product offerings
• Create new services
Defenders • Take care of clients as best they can
Need relationship models
• Form distribution partnerships
• Build out business banking centers
• Leverage technology
• Use interest to attract deposits & gain foothold
• Non-traditional competitors: on-line only players, non-bank players
• Launch innovative mix of interest and product-based campaigns
Attackers
• Community banks looking to attract business
• Regional banks seeking to improve competitive positioning
23
* Rates comparable to
consumer
*Primarily bank-led,
with few new
entrants
* Use rates to
consolidate business
& personal accounts
* 3% shift in Small to
Medium Enterprise
relationships
* Deposit demand
drives incumbent
and new entrants to
innovate
* Higher interest rate
environment
* Introduction of new,
non-traditional
competitors
* Increased innovation
to increase retention
and/or gain market
share
* Up to +18% increase
in DDA Net Interest
Income
Strong recovery in lending markets,
combined with lower w/s funding
* Moderate reaction
to repeal
Moderate levels of macro lending,
spurring need for funds
Lower rate environment,
low levels of lending activity
Interest Rate/Economic Impact
* Significant increase
in competition
* Banks and nontraditional
competitors launch
high-interest rate
products
* Significant inflows
from credit markets
(MMF)
* Align asset-liability
ratios with new
guidelines
*Could generate as
much as $200B in
additional deposit
demand (*)
Source: McKinsey Global Concepts Reg Q Repeal Debate:
The Future of the Commercial DDA, December 2010
24
Economic Impact (*)
Leveraging Interest DDAs could generate up to $200B in
Additional Deposit Demand
Funding Demand - $ Billion
250
$50-60
200
150
$140-200B
Other
Borrowings
$40-60
Deposit
funding
100
L-T
Debt
$10-20
$10-20
50
$30-40
A/L
Ratios
0
Issuers
Investment
Banks
Brokers
Domestic Commercial
Banks
Finance
Total
Source: McKinsey Global Concepts Reg Q Repeal Debate:
The Future of the Commercial DDA, December 2010
25
Advice & Suggestions
• Questions
• Considerations
Questions
• Board of Governors Commentary/May 16, 2011
– Does the repeal of Reg Q have significant
implications for the balance sheets and income of
depository institutions: What are the anticipated
effects on bank profits, on the allocation of deposit
liabilities among product offerings and on the rates
offered and fees assessed on demand deposits,
sweep accounts, and compensating balance
arrangements?
– Does the repeal of Reg Q have any implications for
short-term funding markets such as the overnight
fed funds and Eurodollar markets, or for
institutions such as institution-only MMM mutual
funds that are active investors in short-term
funding markets?
– Is the repeal of Reg Q likely to result in strong
demand for interest-bearing demand deposits?
– Does the repeal of Reg Q have any implications or
competitive burden on smaller depository
institutions?
• Key
Everyone’s got it figured
out (but me) ?
Not Really ...
Banks
• How does this align with the
•
bank’s broader strategy?
What approach will work best for
your clients/marketplace?
Corporations
• How does this match up against
•
your treasury management
guidelines?
What options are available?
27
Considerations
• Talk to your bank/Talk to your clients
• Apply investment guidelines to decisions
(Corporate)
– Safety
– Liquidity
– Return
(Bank)
- Market need
- Product priorities
- ROI
• Consider hard and soft dollar expenses
•
– Labor
– Time
– Convenience
Review regularly
– Annually
– In conjunction with loan review
– Event driven
My bank will take
care of it for me ?
Do you really want them to?
… Take ownership
… Evaluate periodically
My clients know
what they want to
do ?
Probably not ...
… If you don’t talk to them,
your competitors will
28
Q&A
“Chance favors only the prepared mind.”
Louis Pasteur
“Decide what you
want,
decide what you are willing
to exchange for it. Establish
your priorities and go to
work.”
H.L. Hunt
“And they discovered
something very interesting:
when it comes to walking,
most of the ant's thinking and
decision-making is not in its
brain at all. It's distributed.
It's in its legs.”
Kevin Kelly
30
Thank You!
Gail Angel
[email protected]
773 907-2400
Tom Ormseth
[email protected]
630 516-4692
31