10th Apr 2018

Basel III | Regulatory Challenges for Treasury & Finance

Basel III, the biggest change to banking regulations in decades, is discussed here. The changes are so profound that they will affect corporates as well. Some of the ways corporates will need to change their practice are explored here, as well as the technologies that can play a vital role.



So, Basel III. It’s one of the biggest regulatory changes the banking industry has been through in decades. How do you see those changes impacting the relationship between banks and corporates, and how do you think business should adapt?


Basel III regulations are coming down the line like a freight train and the banks will have to incorporate a lot of changes. For example, the requirement on intra-daily liquidity reporting then we’re going to see some of the requirements that the banks have to comply with inevitably trickle down to the corporate sector because the banks are going to have to report on a new set of data, or a new set of data requirements that they haven’t that they haven’t been reporting on previously and they haven’t had access to the data for.

So, they’ll be able to identify predictable patterns of behaviour, they’ll be able to forecast patterns of behaviour in terms of currency flows. Those data sets inevitably will be made available to corporate treasurers of corporate entities. So, they could make good use of that type of information to identify good payers, bad payers, predictable patterns etc, and manage their own balance sheet more effectively. This is the upside!

On the downside, depending on which side of the fence you’re on, the banks will be able to identify exactly who is using and who are the consumers of that intra-daily liquidity. An inevitable step is that they’ll start charging for that so corporates might find that where they are heavy consumers of intra-daily liquidity from their bank provider they may start incurring a charge for that.

We’re going to have what the treasury alliance calls the ‘end of notional pooling’. The notional pooling is a key tool of treasurers today whereby they can have multiple branches, multiple jurisdictions, multiple banks within those jurisdictions and pool balances together. So, you could have one entity which is cash rich, and one which isn’t. As long as they have a bilateral agreement between them, they can net the position and not carry an overdraft where they don’t have the cash.

However, with Basel III the insistence now from regulators, this is not necessarily the correct way to conduct banking because you’re not truly reflecting the capital position of a corporate entity at any given point. You’re almost hiding or shadowing the position from another area so IS32 (Investment Accounting Standards) which have been revised under the 32nd version necessitate that the kind of pools be exposed and advised on, so what does this mean for corporates? At the end of the day, a lot of the corporates today within Europe would be notional pooling, more so than the US. In the US, the concept of an overdraft doesn’t exist for many corporates and SME would have to get a credit line to have that facility. Whereas in Europe we allow an overdraft to occur and we charge an interest for it.

Now, this whole concept of notional pooling has allowed for treasurers to carry on without having to sufficiently fund their entities. What this will mean is they will now have to have very hands-on visibility of cash positions across various entities and tools like Cash Management would allow for them to quite easily and quickly be alerted to positions where they do have a short position so they can fund it because the future is banks themselves aren’t themselves going to offer notional pooling so speaking to a number of large banks, their end strategy is to get rid of notional pooling because of the regulatory requirements that stand behind it. Also, there is a larger scrutiny on the banks positions during the day.

The intra-daily liquidity positions, if they’re allowing this kind of bilateral agreement to be placed between branches, is that truly reflective of a.) the clients’ positions and b.) the banks position because the bank would inevitably have to net off against another one of their entities, so this is a challenging time, thankfully humanity always finds a way of finding a solution. Fintech’s are finding solutions and AccessPay is one of those products that would help a treasurer find an alternative to notional pooling.

Access to real-time info becomes much more important. Conducting trend analysis and being aware of forecasting are key things which are going to become a huge part in the way treasurers conduct themselves.

If you take notional pooling within a provider, out of the equation then you have to have greater visibility of where your cash is, and it has to be a bank agnostic solution because if you take away notional pooling, what you’re probably going to end up with is corporate treasury is going to have to bring in a process of physical pooling so you’re going to have to manually move these funds between providers, so you need a solution , you need technology to sit between the corporate and the bank and aggregate that info and allow the corporate treasurer to make decisions to move the funds physically in the market. But in order to do that, in order to make timely decisions, you need real-time information.