Liquidity Management in the New Era Regulatory Update

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1 Liquidity Management in the New Era Regulatory Update Jeff Avers Director, Corporate Liquidity Specialist April 205

2 Regulatory Reform: Strengthened but not Simplified 2

3 Regulatory Reform A Sampling Higher bank interest expense on deposits Reduced Fee Income NSF/Overdrafts (Regulation E) Debit Interchange (Durbin Amendment) Increased Fees Uncollateralized daylight overdrafts FDIC Reduced Revenue Streams Volcker Rule Potential divestitures Increased Balance Sheet Costs Basel III Capital Ratios Basel III Liquidity Coverage Ratio 2a-7 Money Fund Reform 200 Changes 206 Changes Development costs for new products Reduced value of deposits Reg Q repeal Basel III - Higher liquidity levels needed to support the commercial business Increased emphasis on minimizing marginally profitable and unprofitable relationships Employee training Increased cost of compliance & oversight Human, Systems, tracking and reporting Discontinuation of Free Checking Collateralized Deposits Syndicated Credit Facilities Increased Bank Expenses Increased Customer Expenses 3

4 Key Regulatory Changes Impacting Liquidity Management Banks: Fed Funds Target lowered from 4.25% Q 2008 to 0-.25% 4Q 2008 Unlimited FDIC Insurance: late 2008 through December 202 FDIC Coverage raised from $00K to 200K per depositor Regulation Q Repealed Money Funds: Implemented 200 Max Weighted Average Maturity reduced from 90 to 60 days 30% of portfolio must mature within one week and 0% must mature overnight Max of 2 nd tier securities reduced from 5% to 3% 2 nd tier issuer limit reduced from % to /2% Max maturity of 2 nd tier securities reduced from 397 to 45 days 4

5 Corporate Cash Has Been Increasing Source: Federal Reserve Bank Trends In Corporate Cash Grew from $500 Billion in 988 to more than $2.2 Trillion at the end of 203 Checkable deposits as a percent of Corporate Cash have increased steadily since 2008 Relative Value of ECR Unlimited FDIC through 2/3/202 Declined from 25% in 988 to.9% in 2008, before growing to 20% in 203 Source: Federal Reserve Bank 5

6 Liquidity Solutions (Market Benchmarks) Rates continue to be at or near historic lows MARKET RATES FOR CASH INVESTMENT INSTRUMENTS Market Benchmarks High 204 Low 204 Average 3 year Average Fed Funds Effective Rate FFE bps bps bps bps 3 bps 6 bps 8 bps 0 bps 2 bps 30-Day Nonfinancial Commercial Paper CP 8 bps 8 bps 9 bps bps 7 bps 3 bps 7 bps 9 bps bps 30-Day Financial Commercial Paper CP 9 bps 0 bps 2 bps bps 3 bps 4 bps 8 bps 9 bps 2 bps Repurchase Agreements 2 Repo 9 bps 3 bps 3 bps 8 bps 25 bps 2 bps 9 bps 3 bps 4 bps Month U.S. Treasury UST 2 bps 2 bps 2 bps 3 bps 7 bps bps 3 bps 5 bps 6 bps Month Eurodollar Deposit Rate Euro$ 9 bps 9 bps 9 bps 8 bps 20 bps 7 bps 8 bps 22 bps 27 bps Month LIBOR 3 M LIBOR 8 bps 7 bps 7 bps 6 bps 7 bps 5 bps 6 bps 8 bps 2 bps 3 Month LIBOR 4 3M LIBOR 27 bps 26 bps 25 bps 24 bps 26 bps 22 bps 23 bps 28 bps 32 bps Crane Treasury Institutional MF Index 5 MMF bps bps bps bps bps bps bps bps bps Crane AAA Prime Institutional MF Index 5 MMF 4 bps 3 bps 3 bps 3 bps 3 bps 2 bps 3 bps 6 bps 7 bps 5 Year Average Source: 2 Source: 3 Source: 4 Source: 5 Source: Crane Data. 7-Day Yield 6 6

7 Deposits Share of Corporate Cash Has Grown Significantly Have Replaced MMF Investment Allocations May Return to Pre-2008 Levels Cash investors have been increasing their allocation to bank deposits over the last seven years, while simultaneously decreasing their allocation to money market mutual funds 7 7

8 New & Proposed Regulatory Changes Impacting Liquidity Mgt Basel III LCR 2a-7 Reform Reg Q Repeal Fed Policy 8

9 Basel III Liquidity Coverage Ratio Per the Securities and Exchange Commission: The LCR requires a banking organization s stock of unencumbered high-quality liquid assets (HQLAs) to be at least 00% of its total net cash outflows over a 30-day standardized supervisory liquidity stress scenario Subject to Full LCR Subject to Partial LCR Not Subject to LCR U.S. Bank Holding Companies with $250 billion in total consolidated assets U.S. depository institution holding companies with $50 billion in total consolidated assets U.S. bank holding companies (BHC) or Savings & Loan Holding Companies (SLHC ) with < $50 billion in total consolidated assets *Includes the top 9 US Banks ranked by assets as of 2/3/204 *Includes the 0 th through 33rd largest US. banks ranked by assets as of 2/3/204 *Includes the remaining U.S. banks and bank holding companies * Source: SNL Financial Rankings as of December 3, 204 9

10 Assets $250 billion Assets $50 billion Basel III Banks Assets $50 billion Parent Company Assets ($B) As of 2/3/204 JPMorgan Chase 2,46 2 Bank of America 2,02 3 Citigroup,88 4 Wells Fargo,527 5 Bank of New York Mellon U.S. Bancorp PNC Financial Capital One HSBC North America State Street 243 TD Bank US BB&T 82 3 SunTrust 75 4 American Express 53 5 Ally Financial 5 6 Charles Schwab 44 7 Fifth Third 30 Parent Company Assets ($B) As of 2/3/204 8 M&T 24 9 USAA RBS Citizens 22 2 Regions Financial 7 22 BMO Financial 23 UnionBanCal Northern Trust KeyCorp BancWest Discover Financial Santander USA BBVA Compass Deutsche Bank Trust 67 3 Comerica Huntington Bancshares Zions BanCorp 56 Source: SNL Financial Rankings as of December 3, 204 0

11 Basel III Liquidity Coverage Ratio Deposit Runoff Factors Basel III Liquidity Coverage Ratio: Deposit Behavioral Issues Stable Deposits (3-5% Runoff) Less Stable Deposits (0% Runoff) Retail/Consumer and Small Business Stock of Highly Liquid Assets Wholesale Operational (25% Runoff) Wholesale Under the LCR standard, each dollar of assumed runoff requires an offsetting dollar of liquid asset buffer. Runoff assumptions will therefore have a significant impact on deposit profitability. Other Wholesale Non-Financial (40% Runoff) Other Wholesale Financial (00% Runoff) PwC

12 Credit Risk: Depositors have a preferred claim DIC National Depositor Preference Rule FDIC National Depositor Preference Rule Order of Settling Claims in the Event of a Bank Failure Administrative Expenses of the Receiver 2 Any Deposit Liability of the Institution Insured Deposits are settled first, followed by uninsured deposits Eurodollar and other offshore deposits are considered a general creditor obligation 3 Any Subordinated Obligations 4 Any Other General or Senior Liabilities of the Institution This includes offshore deposits 5 Any Obligation of Commonly Controlled Depository Institutions for Cross- Guaranty Assessments Under 2 U.S.C. 85(e)(2)(C) 6 Any Obligations to Shareholders or Members (including Holding Companies and their Creditors Source: Federal Deposit Insurance Corporation 2

13 Credit Risk: Depositors have a preferred claim DIC National Depositor Preference Rule Changes to Moody s Bank Rating Methodology Announced by Moody s on March 7, 205 Previous Approach Each bank is assigned a single overall long-term rating Deposits and other forms of unsecured long-term debt are considered as part of the bank s long-term debt structure New Approach The bank is not assigned an overall rating Individual classes of long-term debt are each assigned their own rating Deposits are given their own unique rating Long-term unsecured debt is given it own unique rating Net Effect Deposits will likely be rated higher than a bank s unsecured debt in recognition of the depositor s preferential claim over that of general creditors Source: Moody s Investors Service 3

14 204 SEC 2a-7 Money Fund Reform October 206 Implementation Net Asset Value Prime and municipal funds convert to floating NAV - NAV to be calculated to 4 decimal places ($.0000) Treasury and government funds remain stable NAV Liquidity Fee Weekly liquid assets < 30% Fund Board may impose a 2% redemption fee Weekly liquid assets < 0% % redemption fee - Fund Board can determine otherwise Redemption Gate Weekly liquid assets < 30% Fund Board may suspend redemptions for up to 0 days 4

15 Money Fund Reform: 203 AFP Liquidity Survey Potential Impact of a Limit on or Charging of Fees for Full Redemption of MMF Holdings on Organization's Willingness to Invest in MMF s 55%+ 5

16 Money Fund Reform: 203 AFP Liquidity Survey Potential Impact of a Floating NAV on Organizations Willingness to Invest in MMFs 65% 6

17 Impact of Reg Q Repeal ¹ When Interest Rates Rise, The Repeal of Reg Q plus Money Fund Reform Could Drive Corporate Cash Balances onto Bank Balance Sheets Provided the Banks Want the Liquidity In countries allowed to pay interest on checking, corporates maintain 60-70% of their liquidity in the banking system Percent of Total Corporate Liquidity Held in Bank Deposits* 80% 60% 40% 20% 0% US Reg Q France Post-Reg Q UK No Reg Q *Source: 200 AFP Liquidity Survey and Treasury Strategies Global Liquidity Research This is a positive outcome for U.S. banks only if loan demand and deposit growth are in synch ¹ Repealed in 20, Regulation Q was a 930s Depression Era regulation that disallowed banks from paying interest on commercial checking accounts 7

18 The Impact of Reg Q Repeal: The Future of Sweep Post Reg Q Repeal, the Primary Purpose of Sweep Has Changed Old Paradigm Obtain yield on idle cash balances Primary Purpose of Sweep Post-Reg Q Diversify away from bank risk Obtain yield in excess of interest-bearing DDA Money Funds Eurodollar Deposits Repo Bank Parent Commercial Paper Predominant Sweep Vehicles Repo (eliminate credit risk) Money Funds (diversify away from bank risk) Bank Parent CP (yield enhancement) Alternative off balance sheet products $800 Total U.S. Sweep Balances ($B) $700 $600 $500 $400 $300 $200 $00 $ YTD Source: Treasury Strategies proprietary research; Commercial Deposit/Sweep Study & Global Corporate Liquidity Research 8

19 Will Deposit Investment Allocations Return to Pre-2008 Levels Source: 203 AFP Liquidity Survey Cash investors have been increasing their allocation to bank deposits over the last seven years, while simultaneously decreasing their allocation to money market mutual funds 9 9

20 Will Deposit Investment Allocations Return to Pre-2008 Levels Factors Affecting Cash Held in Bank Deposits 57% 49% 33% 3% Yield in Alternative Options CAPEX/Acquisitions Credit Exposure MMF Reform Source: 203 AFP Liquidity Survey 20 20

21 Summary of Today s Discussion Basel III LCR 2a-7 Reform Reg Q Repeal Fed Policy SunTrust Bank, Member FDIC. SunTrust is a federally registered service mark of SunTrust Banks, Inc. 04/3 2