Starting on January 1, 2016, banks will be required to distinguish between client deposits that are “operating” and “non-operating” for the purpose of a new Liquidity Coverage Ratio Requirements(LCR) established by the Dodd-Frank Wall Street Reform Act of 2010. The new LCR will apply reserve rates to banks with minimum assets of $50 billion or more, and escalates on bank size. Regional banks will have LCR rates in the teens while the top eight banks will have rates in the 20%+ level.

The LCR is used for the purpose of banks setting aside capital reserve funds in case of another financial crisis; it requires banks to provide 30 days or more of liquidity in case there is another “run on the bank” scenario. The LCR will apply to non-operating funds and not to the banks’ day-to-day operating funds. Therefore it will be essential that entities and their banks have a full understanding of the type of funds that are on deposit.

This is how operating and non-operating funds will be classified:

Operating funds are those that are on deposit for the purpose of the day-to-day cash-flow needs of an entity. While these funds still need to be collateralized for a public entity, the LCR requirement will not apply. The federal government classifies these funds as “sticky” and not apt to move from bank to bank.

Non-operating funds are those that are considered reserve funds and not necessary for day-to-day liquidity purposes. These fund are considered “at risk,” movable from bank to bank by an entity to achieve a higher-interest return. Going forward, these funds will be considered unprofitable to banks, due to LCR rates and collateral costs of 20 basis points or more. As a result, you will find your bank(s) not wanting or accepting these funds.

What is an entity to do from January 2016 on?

First, distinguish which of your funds are operating and which are non-operating.

Second,have a conversation with your bank(s) and ask them what you can expect.

Third, for those funds not likely to be wanted or accepted by your bank, consider aBank Deposit Investment Account (BDIA).

A Bank Deposit Investment Account is an account that is still held by your bank but is managed by an outside Register Investment Advisor (RIA) who specializes in the management of short–term public funds. The account is still 100% liquid, earning a much higher rate, and is collateralized by the government treasuries and municipal bonds the funds are invested in. A BDIA provides safety, liquidity, and a much higher rate even in this low-interest-rate environment.

At three+one, we help entities distinguish between operating and non-operating funds and then provide such data to the entity, their bank(s), and their Registered Investment Advisor.

The end result is taking a new federal requirement challenge and turning it into an opportunity to strengthen your banking relationship, while earning higher rates on public funds.