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What Basel III bank liquity ratios may mean for you

The Basel accords and, more specifically, the Basel III Liquidity ratio, which is our focus today, are generally aimed at ensuring that large "too big to fail" banks will always have enough liquid assets to meet the demands made on it each day.

The Basel III liquidity ratio is a simple ratio which places a banks Liquid Assets, meaning cash, Treasuries, and Agencies, over its Stressed Cash Outflows, meaning maximum foreseen withdrawals during a liquidity crisis. The banks must report this ratio at a set time every business day. If the ratio is over 100%, all is well. If not, not, meaning the bank could be forced by regulators to initiate a strategy to unwind its operations.

Serious stuff.

While the numerator of the liquidity ratio is extremely simple to calculate, it is driven by the denominator, which is infinitely more complex. This is where you come in.

Banks will be required to stratify their deposit customers well beyond the simple consumer and business account denominations that have sufficed to some degree until now. They are now required to carefully monitor customers to better understand their daily inflows and outflows from their accounts in order to arrive at a maximum Stressed Cash Outflow number for each category of account.

As a practical matter, the bank will assign each category of customer and account a "run-off" factor, which is expressed as a % of the account's balance on any given day that may "run" out of the bank. Again, this number is critical for the bank, as it ultimately determines its reinvestment strategy and, by extension, how profitable a deposit customer is.

The good news is that consumer and small business accounts which are FDIC insured are, as of the most recent comment period, assigned a 3% run-off factor. Meaning that for every $100 on deposit, the bank must buy $3 worth of Treasuries as an offset, and it is free to invest the remaining 97% in loans or other more profitable investments.

This means that competition for deposits from consumers and small businesses just got more intense, which should generally be good news for customers. They should expect to see increased savings rates and incentives to hold both more cash and conduct more business at a specific bank, as it will be in the bank's best interests to retain them and understand their spending habits.