The Hidden Cost of Financial Reform and
Regulations on Banks and Their Clients
The UNC Treasury Management Series
October 1, 2012
Jeff Avers
Group Vice President
Treasury & Payment Solutions
Liquidity Strategy & Consulting
Financial Regulation and Your Business
Regulatory and Economic Environment
Impact of Regulations
Corporate Governance
The Perfect Storm
Working Capital Management
International
Closing Remarks
Reference Materials
2
Three Key Points for Today’s Financial Reform Discussion:

Financial Reform is complicated, widespread and painful

It will have a financial impact on both banks and their clients

It will have (and already has had) an impact on corporate and
institutional liquidity management and payment practices
3
Regulatory Environment
4
Regulatory Environment
5
Regulatory Environment
New regulatory entities created
by Dodd-Frank
Entities eliminated by Dodd-Frank
1. Office of Thrift Supervision
1. Consumer Financial Protection
Bureau
2. Financial Stability Oversight Council
3. Office of Financial Research
4. Federal Insurance Office
5. Investor Advisory Committee
6. Office of Housing Counseling
7. Office of Minority and Women
Inclusion
8. Office of Investor Advocate
9. Office of Credit Ratings
10. Office of Municipal Securities
11. Office of Whistleblower Protection
6
Regulatory Environment
7
Regulatory Environment
8
Regulatory Impact – A Sampling
Dodd-Frank – 400 new rules, requires banks to do 92
new studies and issue 44 periodic reports
Only 33% of rules due by May 1, 2012 were finalized
 Regulation Q repealed: banks can begin to pay
interest on commercial checking deposits
 FDIC mandates unlimited deposit insurance on all
checking/transaction accounts

FDIC insurance coverage permanently raised from
$100,000 to $250,000
 Should increase the number and total balances
of CDs between $100,000 and $250,000
Published by Wall Street Journal ; December 5, 2011
 FDIC deposit assessment changed from being based
on quarterly ledger deposits to being based on
consolidated assets minus average tangible equity
9
Regulatory Impact – A Sampling
Basel III:
 Requires new standards for Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio
 LCR will only consider “free” or “unencumbered” securities” to be liquid
 Repo collateral and government deposit collateral are not unencumbered
 Deposit runoff assumptions exceed those realized in 2008-9
 Consumer vs. Wholesale and single-product vs. multi-product relationships have differing runoff
assumptions

New capital requirements will likely increase loan pricing and may limit banks ability to lend to certain
clients
 Total Capital remains at 8% with discussion about raising it to 10%*
 Tier 1 Capital is raised from 4% under Basel II to 6% by 2015 under Basel III*
 Minimum common equity raised from 2% under Basel II to 4.5% by 2015 under Basel III*
 Increased capital requirements plus basing FDIC on assets will drive some lending to ‘non-banks’
Basel III Capital Framework
Capital Requirement Milestones
All numbers are percentages
Minimum
Common
Equity
Tier 1
Capital
Total
Capital
4.5
6
8
Conservation Buffer
2.5
2.5
2.5
Minimum Plus Buffer
7
8.5
10.5
Minimum capital requirements: Start of the gradual
2013 phasing-in of the higher minimum capital requirements.
Minimum capital requirements: Higher minimum
2015 capital requirements are fully implemented.
Conservation buffer: Start of the gradual phasing-in of
2016 the conservation buffer.
Conservation buffer: The conservation buffer is fully
2019 implemented.
* The Basel III capital minimums include an additional 2.5% “buffer.”. A bank must meet the
minimum plus the buffer in order to be fully eligible to pay shareholder dividends, as well as
pay discretionary bonuses to employees.
10
Impact of Money Fund Reform
SEC Money Market Fund Rule 2a-7 was changed in 2010 to reduce shareholder/investor investment risk
Regulatory Changes
Impact
2010 Changes



Maximum allowable weighted average maturity (WAM) was
shortened from 90 days to 60 days
The overall credit quality of portfolios was improved, and
A twofold liquidity requirement was added… with 30% of
assets maturing within a week and 10% required to mature
overnight
Lessened investor risk, while also lowering the relative yield on
a permanent basis
SEC Currently Proposed Changes



Maintain a capital buffer in order to serve as the first point of
loss absorption to the extent required
Convert from $1.00 NAV to a Variable NAV, and
Restrict redemptions so that up to 10% of a redemption is
held back for up to 30-days
SEC Recent Compromise Proposal
Rather than implement all proposed changes, each 2a-7 money
fund must either:


Convert from $1.00 NAV to variable NAV, or
Maintain $1.00 NAV and implement the capital buffer and
restrictions on redemptions described above



Likely Net Overall Effect
11
Lessens investor risk
Lowers the relative yield
Reduces investor appetite leading to:
 Decreased MMF investment assets
 Increased bank deposits
 Funding concerns for FI and Corporate issuers
Financial Impact – A Sampling
Higher interest expense on deposits
Reduced Revenue Streams
 Volcker Rule
 Potential divestitures
Reduced Fee Income
 NSF/Overdrafts (Regulation E)
 Debit Interchange (Durbin
Amendment)
Revamped marketing collateral
Increased Fees
 Uncollateralized daylight overdrafts
 FDIC
Client communication costs
Development costs for new products
Employee training
Reduced value of deposits (“FTP”)
Increased cost of compliance & oversight
 Human, Systems, tracking and reporting
Increased emphasis on eliminating
marginally profitable and unprofitable
relationships
Discontinuation of “Free Checking”
Increased Bank Expenses
Increased Customer Expenses
12
Market Rates for Cash Investment Instruments
Alternative Cash Investment Options
Short-term Investment Instrument
Rate as of
7/19/2010*
Rate as of
7/13/2011*
Rates as of
9/14/2012*
Overnight Instruments
52-Week*
Low
High
Fed Funds
20 bps
6 bps
19 bps
6 bps
19 bps
Repo
25 bps
2 bps
33 bps
3 bps
33 bps
SunTrust ECR (Analyzed Business Checking)
Ask Your SunTrust Treasury Management Representative
SunTrust ECR/Rate Paid (Analyzed Interest Checking)
Ask Your SunTrust Treasury Management Representative
30-Day Instruments
9/14/2012*
Low
High
15 bps
2 bps
9 bps
0 bps
11 bps
Commercial Paper
29 bps
12 bps
7 bps
3 bps
13 bps
Eurodollars
25 bps
12 bps
12 bps
12 bps
23 bps
Libor
33.8 bps
18.7 bps
22 bps
20.5 bps
29.6 bps
SunTrust Money Market Account Rate
Ask Your SunTrust Treasury Management Representative
Low
7/19/2010
Treasuries
15 bps
3 bps
10 bps
0.5 bps
11.5 bps
Commercial Paper
42 bps
15 bps
16 bps
12 bps
20 bps
Libor
51.25 bps
24.9 bps
38.5 bps
26.8 bps
58.25 bp
Eurodollars
45 bps
15 bps
20 bps
20 bps
28 bps
AAA-Rated Taxable Money Funds: 7-day Yield as of
6/30/2010
6/30/2011
8/31/2012
Low
High
High
1 bps
1 bps
1 bps
1 bps
1 bps
Crane AAA Prime Institutional MF Index
12 bps
4 bps
8 bps
7 bps
10 bps
Local Government Investment Pools: Monthly Yield as of:
July 2010
June 2011
Aug 2012
Low
High
Georgia Fund 1 LGIP (Monthly yield)
21 bps
13 bps
15 bps
9 bps
15 bps
Florida Prime LGIP (Monthly yield)
39 bps
23 bps
30 bps
21 bps
33 bps
13


90-Day Instruments
Crane Treasury Institutional MF Index
9/14/2012*


Treasuries
7/13/2011
Overall market rates have been
cyclical over the last 2 years
Most money market
instruments are currently in
the top half of their 52 week
High-Low range
While overnight rates are
similar to those in the summer
of 2010, with the exception of
Libor, 30-day and 90-day rates
bare more similarity to the
summer of 2011
The “Greek situation” has
caused a flight to safety,
suppressing the yield on US
Treasuries
Money Market Mutual Fund
yields continue to be anemic
SunTrust Sweep Yields
As of August 31, 2012
Master Note
Repo
Eurodollar
Federated Prime
Fund
35/20 bps
3 bps
10 bps
4 bps
Treasury
1 bps
• Federated
Rates obtained
from (1) WSJ Money
Fund
Rates, (2) Crane Data (money funds) and
(3) State-specific LGIPs
13
The Perfect Storm
There is a potential “Perfect Storm” brewing
Each event individually is likely to
reduce the portion of corporate cash
held in bank deposits. This
combination of events, slated to
happen within a 12-24 month period
of one another ,will serve to reduce
and redistribute bank deposits in
favor of the following destinations:
Bank Deposits





Expiration of Unlimited FDIC
Economic Recovery
Rising Rates
Repeal of Reg Q
Redeployment of Corporate Cash
Likely Future
of Corporate
Cash Cash
Likely
FutureDestinations
Destinations
of Corporate
 Alternative Cash Investment Options
 Money Market Funds
 Investment Sweep
 US Treasuries and Government Agencies
 Commercial Paper and other cash investment
Instruments
 Non-interest-bearing DDA will convert to interestbearing DDA and/or investment sweep
 Cash will be used to fund Capital Expenditures,
Acquisitions, and for other strategic purposes
 The percent of corporate cash maintained in bank
deposits will likely begin to revert to pre-2008 levels
 2007 – 27% of corporate cash held in bank deposits
 2012 – 51% of corporate cash held in bank deposits
14
Unlimited FDIC and the DDA Bubble
Possible Destinations of Non-Interest-Bearing DDA at End of 2012:
All
Rev
<
$1B
Rev
>
$1B
Net
Borrower
Net
Investor
59%
61%
58%
64%
53%
Prime MMF
17
11
24
20
16
Treasury MMF
16
14
19
16
17
Treasury/Agencies
14
21
10
9
23
Repo
6
9
4
7
5
Other
8
5
10
4
11
Destination*
No Significant
Change to DDA
* Source: 2012 AFP Liquidity Survey
15
¹
Impact of Reg Q Repeal
New Regulations Could Drive $1.5T onto Bank Balance Sheets
When interest rates rise, we could see an additional $1.5 trillion flow back onto bank balance sheets.
 In other post and non-Reg Q countries, companies hold as much as 50 - 70% of total liquidity in bank
deposits
 In addition to Reg Q repeal, two current regulations could potentially drive even more liquidity back into the
banking system - changes to 2a-7 regulations and collateral requirements for derivatives trading
Percentage of Total Corporate Liquidity Held in Bank Deposits*
In U.S., 25% of
Corporate
Liquidity = $1.3T
Reg Q
Post Reg Q
No Reg Q
80%
70%
This is a positive
outcome for U.S.
banks only if loan
demand catches up
to deposit growth
60%
50%
40%
•Source: 2010 Treasury Strategies’ proprietary
research; Commercial Deposit/Sweep Study &
Global Corporate Liquidity Research
30%
* Bank Deposits Defined as:
DDA/Current Accounts, Offshore
Deposits, Time Deposits/CDs,
Savings/MMDAs and Sweep Accounts
10%
20%
0%
U.S.
France
UK
A Likely Unintended Consequence of Reg Q Repeal
The Banking Industry will likely need to revise
the pricing structure of the Treasury
Management business in order to reflect the
impact on revenue and profitability of the Repeal
of Reg Q and the associated reduction or
elimination of non-interest-bearing deposits
For the typical treasury management
bank, 60-70% of the revenue and 80-90%
of profit comes from the spread on noninterest-bearing deposits
16
¹ Repealed in 2011, Regulation Q was a 1930s Depression Era regulation that disallowed banks from paying interest on commercial checking accounts
The Economic Recovery May be Funded by Cash
Redeploying Cash vs. Borrowing to Fund Capital Expenditures
Percent of Companies Self-Funding their 2010 and 2011 Capital
Expenditures and Planning to Self-Fund in 2012
Source: Greenwich Market Pulse, January 2012
Given the build-up of cash over the last 3-4 years, companies have been self-funding
a major portion of their capital expenditures… and are likely to do so going forward
Banks usually benefit from an economic recovery through the expansion of their
lending and/or underwriting activity… which may be slow in coming this time
17
Deposit Investment Allocations May Return to Pre-2008
Levels
1
Source: 2012 AFP Liquidity Survey


Cash investors have been increasing their allocation to bank deposits over the last six
years, while simultaneously decreasing their allocation to money market mutual funds
With more certainty around the future of money market funds, when rates begin to rise cash
investors are likely to reallocate their portfolios to be weighted no more than 25-30% in
bank deposits, which is consistent with pre-2009 levels
18
18
The Future of Sweep
Post Reg Q Repeal, the Primary Purpose of Sweep Has Changed
Primary Purpose of Sweep
Old Paradigm

Post-Reg Q


Obtain yield on idle cash balances
Diversify away from bank risk
Obtain yield in excess of interest-bearing DDA
Predominant Sweep Vehicles








Money Funds
Eurodollar Deposits
Repo
Bank Parent Commercial Paper
Repo (eliminate credit risk)
Money Funds (diversify away from bank risk)
Bank Parent CP (yield enhancement)
Alternative ‘off balance sheet’ products
Total U.S. Sweep Balances ($B)
$800
$700
$600
$500
$400
$300
$200
$100
$2002
2003
2004
2005
Source: Treasury Strategies’ proprietary research; Commercial
Deposit/Sweep Study & Global Corporate Liquidity Research
2006
2007
2008
19
2009
2010
2011
2012 YTD
Corporate Governance
2011 SEC Enforcement Activity
 735 total enforcement actions
 89 actions for financial fraud and
issuer disclosure violations
 57 actions filed for insider trading

Compare to total of 9 cases for 2010,
and 3 cases for 2009
20
Working Capital Management: Payments
 ACH Same-day Settlement
 Mobile Payments
 ISO 20022 – Wire Remittance
 ACH Secure Vault/Credit Push
 Post-Durbin/Dodd-Frank
 Durbin Amendment
 PPACA
 Credit Card Act of 1990
21
Working Capital Management: Liquidity
 FDIC Coverage and Expense
 Repeal of Reg Q
 Sweep Investment Disclosures
 Money Fund Reform
 Change in Allocation of Corporate
Cash Investments
 Counterparty Risk
 Banks and Broker-Dealers
 Corporate/Non-FI
 The TED Spread
Liquidity: The Lifeblood of Business
22
Working Capital Management: Liquidity
TED-Spread
December 1998 – December 2009
September 2008 – June 2011
The Ted Spread
Calculated as the difference between three-month LIBOR and the three-month T-bill interest rate, the TED
spread is an indicator of perceived credit risk in the general economy -- and in particular, the credit risk within
the banking sector.
 When the TED spread increases, lenders believe the risk of default on interbank loans (counterparty
risk) is increasing
 When the risk of bank defaults is considered to be decreasing, the TED spread decreases
The long term average of the TED has been 30 basis points with a maximum of 50 bps.
 During 2007 the TED Spread ballooned to 150-200 bps, in reaction to the subprime mortgage crisis
 On September 17, 2008, the TED spread exceeded 300 bps, breaking the previous record set after the
Black Monday crash of 1987
 In the midst of the fall 2008 credit and liquidity crisis, On October 10, 2008, the TED spread reached
another all-time high of 457 basis points on October 10, 2008
23
 The Ted Spread returned to normal levels in 2010
and has remained there since
International
Europe
 BASEL III
 Stability of European Union
 SEPA - 2014
 European Payments Council
 SWIFT
24
International
Impact of Basel III
25
Eurozone
Economic, Payments & Liquidity Environment
Overview of SEPA
USD-EURO Exchange Rate
05-Dec-11
03-Dec-11
01-Dec-11
29-Nov-11
27-Nov-11
25-Nov-11
23-Nov-11
21-Nov-11
19-Nov-11
17-Nov-11
15-Nov-11
13-Nov-11
11-Nov-11
09-Nov-11
0.76
0.755
0.75
0.745
0.74
0.735
0.73
0.725
0.72
0.715
0.71
07-Nov-11
The main objectives are:
 Standardization and straight-through processing of euro payments
 Eliminate the distinction between domestic and cross-border international
payments within the SEPA Eurozone… creates a payment environment
similar in concept to the domestic US
 Improve efficiencies and provide cost reduction to payers
 Estimated to save payers €29 to €40 billion in transaction and
settlement costs, all of which is to the detriment of bank revenues
 Improved surveillance and transparency of payment flows at the expense
of money laundering and organized crime
SEPA has the potential to recast the payments competitive landscape in Europe
SWOT Analysis: SEPA
Strengths for Payers
Weaknesses (Challenges) for Existing Providers
 Lower cost of transacting business
 Operational efficiencies achieved
 Potential to consolidate payments/receipts with fewer
providers
 Represents a significant hit to revenue
 Requires new investment in infrastructure
 Changes the economics of the payments business
Opportunities for Global FIs
Threats to Existing Providers
 Unique opportunity to gain market share in a major global
region
 Potential to become a primary provider for in-country MNCs
 Ability to leverage existing technology & innovation reputation
 Turmoil in Europe provides the opportunity to leverage
balance sheet strength as a key selling point concerning
counter-party risk and future investment in technology
 Likely to alter the landscape of the payments business
 Volume and revenue is likely to shift away from small providers
in favor of large regional and global providers
 Will cause some providers to exit the payments business, and
others to limit their involvement as a full service provider
 Opens the door for non-European global banks to become
major players in the Eurozone payments business
26
Closing Remarks
“These new regulations will fundamentally change the way we get around them.”
27
Closing Remarks
Summary of Today’s Discussions

Financial reform is complicated, widespread and painful

It will have a financial impact on both banks and their clients

Financial reform will have (and already has had) an impact on
corporate and institutional liquidity management and payment
practices
28
Resources
Publications / epages












AFP Status Update of Current Issues (301.907.2862)
AFP Pulse & Membership (301.907.2862)
AFP’s Homepage: //www.AFPonline.org
Treasury Strategies (www.Treasurystrategies.com)
Federal Reserve Homepage: //www.federalreserve.gov
FDIC Homepage: //www.fdic.gov
NACHA: //www.nacha.org
American Banker (800.221.1809)
SWIFT: //www.swift.com
ISO: //
Wikipedia.com
Investopedia.comw
29
The Hidden Cost of Bank
Regulations on Your Business
The UNC Treasury Management Series
October 1, 2012
2:15-3:30 p.m.
Nick Alex
Senior Vice President, Director of Product Management
The Hidden Cost of Bank Regulations on Your Business reviews the new
Treasury & Payment Solutions
world of rules and regulations that define how treasury managers must
carry out their duties. This session covers a wide range of legal and
SunTrust
regulatory
issues, including corporate governance, IRS guidelines for
business tax payments, HIPAA and SEC interventions. It concludes with an
intermediate term outlook for what else may be coming.
31
32
33
Regulatory Environment
34
Regulatory Environment
 Only 110 of the 398 rulemaking requirements
mandated by Dodd-Frank
have been finalized; 144
have not yet been
proposed
 Deadlines have been
missed for 148
35
36
37
NOTE: SOME RULEMAKINGS ARE ISSUED JOINTLY AND ARE COUNTED UNDER BOTH CATEGORIES
38
40
Regulatory Environment
Current Economic
Context
 Uncertain regulatory environment


U.S. presidential election
Dodd-Frank regulatory reform

Volker Rule
 European economic stability
 Sovereign debt
 Austerity measures
 Other recent legislative changes


Consumer Financial Protection
Bureau (CFPB)
PPACA
41
42
Regulatory Environment
Current Economic
Context
 Uncertain regulatory environment

Dodd-Frank Regulatory Reform


Volker Rule
Consumer Financial Protection Bureau
 Other recent legislative changes




Durbin Rule
PPACA
Credit CARD Act of 2009
American Reinvestment and
Recovery Act of 2009
43
Regulatory Environment
Current Economic
Context
 Uncertain regulatory environment

Dodd-Frank Regulatory Reform


Volker Rule
Consumer Financial Protection Bureau
 Other recent legislative changes




Durbin Rule
PPACA
Credit CARD Act of 2009
American Reinvestment and
Recovery Act of 2009
44
Regulatory Environment
Current Economic
Context
 Uncertain regulatory environment

Dodd-Frank Regulatory Reform


Volker Rule effective July 21, 2012
Consumer Financial Protection Bureau
 Other recent legislative changes




Durbin Rule
PPACA
Credit CARD Act of 2009
American Reinvestment and
Recovery Act of 2009
45
Regulatory Environment
Dodd-Frank in Detail
 Reg Q was repealed, allowing banks to pay interest on Checking
Accounts (effective July 21, 2011)
 $250k FDIC insured cap now permanent (up from $100k)
 Unlimited Insurance
mandated on noninterest bearing
checking accounts, set
to expire December 31,
2012
 The TED Spread,
representing the rates
banks charge each
other to borrow money,
appears to be settling
into a pre-crisis pattern
46
Regulatory Environment
Current Economic Context
M1 Money Supply
2400
Billions of Dollars
2200
2000
The M1 Money Supply
Line has shown a sharp
increase since the credit
crisis in 2008
1800
1600
1400
1200
1000
2007
2008
2009
2010
47
2011
2012 JUL
48
Impact of Regulations
Dodd-Frank
Durbin Amendment
Revenue
FDIC Coverage
Cost
49
50
Corporate Governance
2011 SEC Enforcement Activity
 735 total enforcement actions
 89 actions for financial fraud and
issuer disclosure violations
 57 actions filed for insider trading

Compare to total of 9 cases for 2010,
and 3 cases for 2009
51
52
Privacy
 Overlapping regulations including GLB, FCRA, FACTA, Bank
Secrecy, USA PATRIOT Act, HIPAA, etc.
 Overlapping regulators including the Federal Reserve, FDIC, OCC,
SEC, FCC, various state agencies, etc.
 800 breaches reported in 2011 (compared to 622 for all of 2010)
 Remediation and recovery costs of over $200 per compromised
record
53
54
Privacy
PCI-DSS and PA-DSS Compliance
 Worldwide security standards created and managed by the
Payment Card Industry Security Standards Council (PCI
SSC)

Version 2.0
HIPAA and HITECH
 Changes to HIPAA under the new healthcare reform
law
 HITECH provisions of ARRA
55
56
57
International
Europe
 BASEL III
 Stability of European Union
 SEPA - 2014
 European Payments Council
 SWIFT
58
59
60
61
62
Impact of Basel III
63
64
International
Competition and Cooperation
International Monetary Policy
Coordination
 Ongoing central bank support


Legislative activity
Liquidity support
 International coordination to manage
national funds rates
 G20 Summits
65
“These new regulations will fundamentally change the way we get around them.”
66
Working Capital Management
Payments
 ACH Same-day Settlement
 Mobile Payments
 ISO 20022 – Wire Remittance
 ACH Secure Vault/Credit Push
 Post-Durbin/Dodd-Frank
 Durbin Amendment
 PPACA
 Credit Card Act of 1990
67
Working Capital Management
Liquidity
 FDIC Coverage and Expense
 Repeal of Reg Q
 Sweep Investment Disclosures
 Money Fund Reform
 Change in Allocation of Corporate Cash
Investments
68
69
Resources
Publications / Homepages
 AFP Status Update of Current Issues (301.907.2862)
 AFP Pulse & Membership (301.907.2862)
 AFP’s Homepage: //www.AFPonline.org
 Federal Reserve Homepage: //www.federalreserve.gov
 FDIC Homepage: //www.fdic.gov
 NACHA: //www.nacha.org
 American Banker (800.221.1809)
 SWIFT: //www.swift.com
 ISO: //www.iso.or
71