The Dodd-Frank Wall Street Reform Act of 2010 will exceed 17,000 pages.
The Federal Reserve will move short-term interest rates up slowly by an additional 50 basis points in the second half of 2016.
Big banks will look to push non-operating deposits out the door and limit the size of deposits of their institutional clients.
Regional banks will move upstream and compete aggressively for larger clients and greater market share through acquisitions and a broader focus.
Deposit rates by banks will lag, at least into the second half of 2016.
Electronic banking will become center stage with greater options and more third-party providers, leading to lower costs.
More questions will be asked by your bank(s) and the flow of information will become more transparent.
More deposit alternatives will be offered, such as the Bank Deposit Investment Account (BDIA).
Cash will be monitored very closely, with great accountability required in the reporting of it.
Banks will be more selective in who they do business with and will create more personal banking relationships with their clients.
The year 2015 was a challenging one for the banks to work in a new world of regulations while working to serve their clients. For entities, low-interest rates made it a good time to borrow money but tough to make any on their deposits.
The year 2016 will be sure to bring even more regulations, which could be challenging, but the opportunity to capture higher rates on deposits could increase bottom-line income. January is an ideal time to start reviewing your cash flow and preparing a roadmap for the year.
At three+one we help public and higher education entities prepare for the future, taking on challenges and turning them into new sources of revenue and new opportunities to save money.
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.