Moving Forward Together
by Stephanie Wolf, Head of Global Financial Institutions and Canada Transaction Services, Bank of America Merrill Lynch
Regulatory change is leading to a significant shift in the relationship between banks and their clients. While the changing environment is likely to result in higher costs for certain services and client groups, corporate and financial institution clients are placing more value than ever on the quality of their banking relationships.
It’s no secret that banks are moving into a more complex regulatory environment. The impact of regulatory change is becoming clearer, and banks’ customers are learning about these changes and how they are likely to impact banks and their clients. But with the cost of holding deposits and providing lending services likely to rise, corporate and financial institution customers are increasingly asking, “What does this mean for me?”.
When customers ask this question, they are typically asking about the impact on the availability or cost of their banking services – whether that means the interest rate paid on deposits or the fee that a bank charges for loan services.
The answer is “It depends”. For organisations such as investment managers, hedge funds and private equity companies, the impact of regulatory change on credit facilities and deposits is expected to be significant. For traditional corporate clients, on the other hand, it is likely to be business as usual. Meanwhile, banks and other non-bank financial institutions (NBFIs), such as insurance companies, will fall somewhere in the middle.
Counting the costs
It’s widely understood that new regulations such as Basel III may affect these prices – but why? For banks providing basic services such as deposits and lending facilities, regulatory changes which require banks to hold more capital or high-quality liquid assets have a fundamental impact on the banks’ ability to offer these services in the first place.
The prices charged by banks often take into account the benefit that banks may derive from providing a particular service. For example, if banks have the use of customer money for two days while a cheque is being cleared, and can benefit from access to that money, it will impact the price that the bank charges its customers to clear a cheque.
Similarly, it should come as no surprise that banks make money in the treasury management business by having the use of their customers’ money while executing a transaction on their behalf. For this reason, the value of deposits and the steady annuity stream in treasury management has historically supplemented other businesses where banks may not get as high a return.
Commercial lending arrangements, for example, are not always profitable on a standalone basis, but they can be justified as part of a wider banking relationship if other bank services are part of the relationship. For the last decade, banks therefore looked to deepen client relationships in order to make up for the capital costs related to loans.
This balance may have worked well in the past, but the wave of new regulation is changing the mathematics underpinning this rationale. If regulatory changes mean that banks can no longer make full use of customers’ deposits, the value that the bank gains from treasury management services may decrease. Deposits that the bank would have been able to use in the past – such as a deposit for a non-regulated hedge fund – may no longer have the same kind of value for the bank.
Implications for banks
For banks, a reduction in the value of customer deposits may prompt a reassessment of how such services are priced – leading to one of two outcomes. First, banks may decide to reduce value given for deposits, but also to charge more for other services which have traditionally been supplemented by treasury services. Or, second, banks may discontinue the provision of certain services which are no longer deemed to be profitable.