As a result, the general level of understanding of the Basel reforms and, more particularly its practical impact, is sketchy at best … and that’s a shame.
For our industry, the Basel reforms will have a big impact and those who understand the implications will have a significant advantage.
The Basel reform process culminating in the current Basel III requirements was born out of the global financial crisis. As we all know, some banks and financial institutions in 2008 were caught short by too many assets, insufficient customer driven liabilities and a less than rigorous attitude to risk – a toxic mix that proved disastrous for institutions, customers, governments and economies.
Although the final detail is yet to emerge in Australia, stripped to the core, Basel reforms will require banks to increasingly match assets with liabilities, like for like. The days of borrowing short and lending long are numbered.
This means banks will be required to hold more capital for the same level of banking business that they have in the past. Also, asset and liability types on the balance sheet will drive the level of liquidity that needs to be held to support the asset and liabilities. As, generally speaking, liquid assets generate very low returns when compared with other types of investments, inefficient asset liabilities management will result in higher costs of holding excess liquidity.
Banks will also have to apply different liquidity assumptions to support different asset and liabilities types. As a matter of principle, customer and product “stickiness” will determine the extent of the liquidity benefit.
The more prone to run-off, the lower the liquidity benefit. Put simply, an unbreakable term deposit will receive a higher liquidity benefit than “at call” savings.
Locally, a customer with multiple products at a bank will be deemed “sticker” than a customer with a single savings account.
A customer with a transaction account becomes more important because they are “stickier” and less likely to leave.
This is where Basel III becomes interesting. Banks with stickier customers, those who understand the importance of liabilities and risk will thrive and those who don’t, won’t.
Sticky customers are already attractive for banks (or any other business for that matter) for many reasons. We’ve all heard of the elusive holy grail of financial services, cross sell or cross buy, one and the same. Retained customers are more likely to take up products and the more products they have, the more likely they are to be a loyal and longstanding customer. A cycle that is very efficient for any business in terms of costs, particularly the marketing and processing costs associated with attracting and onboarding a customer.
For banks under Basel III there are additional benefits for sticky customers in terms of capital relief.
So as the dust settles around the prudential reform sphere, what trends may – from a practical perspective – emerge under Basel III?
• Banks will price longer dated savings (i.e. unbreakable term deposits, deposits with 31 days’ notice period) more favourably over at call savings. They are also like to increase the disincentives for breaking term deposit terms.
• Banks will bundle products or offer discounts for additional products which will lead to improvements in the onboarding processes, and the universal application form (one form/process for multiple products) may proliferate. This shift at the front end will drive significant changes in the human and IT infrastructure systems to support the onboarding of the one customer/many products profile.
• Distribution models will converge with intermediaries increasingly competing to broaden financial solutions for customers. Banks, in an effort to attract distributors competent in this regard, will undoubtedly offer unique rewards for those with proven ability to attract the one customer for many products.
• Customer propensity models which can predict at what stage of the customer’s life cycle or relationship with an institution they are more likely buy more products will become even more critical.
The opportunities of Basel III for intermediaries are clear. The liquidity incentives afforded to
Bank manufacturers will ensure intermediaries have multiple products to sell.
While the Australian Prudential Regulatory Authority (APRA) is yet to finalise all the details for Basel III, the direction is clear. Those businesses that understand the implications have time to prepare and succeed.
Lisa Claes is executive director distribution for ING DIRECT
