The global financial crisis of2007 drew attention to failures by financial services institutionsto adequately manage their risks. Governments and regulatory bodiesaround the world have responded by issuing a spate of new laws andregulations, including the Dodd-Frank Act, the Basel III framework,and updates to the European Union's (EU's) Markets in FinancialInstruments Directive (MiFID) and European Market InfrastructureRegulation (EMIR).

In combination, these new guidelines will have a significant impact on how banks do business—which willnecessarily impact their relationships with corporate clients.Treasury & Risk spoke with TakisSironis, risk management senior principal with Accenture,to discuss what corporate clients can expect from their banks inthe near future, and what they can do now to prepare.

T&R: What are the biggestlegislative and regulatory changes on the horizon for bankstoday?

Takis Sironis: We see four primary areasin which impending regulations will have a direct impact on therelationships between banks and their corporate clients. The firstis capital; all kinds of transactions will now require more capitalfrom banks. Basel III, in particular, might have a really punitiveeffect on banks in terms of the capital they must hold. Prices offinancial products will be affected, with the creditworthiness ofthe corporate counterparty determining the size of the impact. Allthe analysis we've seen from the banks suggests that rates andcredit products will be hardest-hit.

T&R: Will it become moredifficult for companies with lower credit ratings to accesslonger-term credit products?

TS: Yes, banks are likely to prefercorporate customers with better ratings and products with shortermaturities.

T&R: Will the new capitalrequirements affect corporate banking clients in other ways, orwill it mostly be through higher prices?

TS: From the corporate point of view, itis worth considering whether to acquire clear capabilities—in otherwords, whether to begin clearing their own financial transactions.Companies that do so will be subject to the same reportingobligations as the banks. But by clearing transactions themselves,companies can reduce the overall price of the transactions.

T&R: How will the derivativesmarket be affected?

TS: In derivatives trades, banks will beheavily impacted by the increase in counterparty credit chargesimposed by the CVA [credit valuation adjustment] capital charge.It's new in Basel III, and it hits transactions that arecollateralized or long-dated. Banks are currently running thenumbers to understand how the CVA capital charge will impact theirfunds transfer pricing. These analyses will also determine howbanks change their product pricing to reflect the CVA capitalcharge, which will obviously be felt by their corporateclients.

That leads us to the second major area in which bankingregulations will affect companies' relationships with theirfinancial institutions: the OTC [over-the-counter] derivativesmarket structure and execution requirements. Derivatives are one ofthe most customized services that banks offer because they meet theclient company's needs for a very specific, complex transaction.The new regulations are designed to increase market transparency inOTC derivatives trades. To the degree that they're successful,banking customers will benefit because there will be increasedcompetition and less emphasis on personal relationships between thecompany and its banks.

T&R: Will other factors work toeither increase or lower prices for corporate bankingclients?

TS: Yes. The third area in which we seethe new regulations affecting banking relationships is arounddocumentation. Banks are going to have to start doing a lot morepost-trade reporting. For instance, they will have to reportdetails of derivatives contracts to regulators. They will also haveto provide clients with more information about a range of products,including retail structured products. If used properly, thisinformation can give corporate clients a better understanding ofthe services they get from their banks.

So even as the documentation requirements increase banks' costs,they exercise more pressure on the banks through increasedtransparency. It's hard to say at this point how these conflictingpressures will affect the pricing of banking products.

T&R: What is the final area in which the regulations will affectbanking relationships?

TS: It's liquidity, which will definitelyhave a major impact on the banks, but it will also be important totheir corporate clients. Under Basel III, there are two newliquidity measures that banks need to conform with: the liquiditycoverage ratio, which requires banks to maintain a buffer ofhigh-quality assets to cover 30 days of outflows aroundliabilities, and the net stable funding ratio, which requires themto keep long-term assets for funding and a minimum level of stableliabilities in relation to their liquidity risk profiles.

Because they specify the quality of assets the bank must hold,these metrics require banks to really understand how they coverliquidity. For instance, if we look at the Eurozone trouble, a lotof European banks may find it difficult to raise U.S.dollar-denominated funding through traditional instruments such asforeign exchange swaps or cross-currency swaps. That puts pressureon internal funds transfer pricing, which at some point may bereflected in pricing of products for corporate clients.

T&R: So, you anticipate that theprimary effect of the liquidity regulations on corporate bankingcustomers will be to raise the prices of banks' products?

TS: They will definitely have an impacton pricing, but they will also have an impact in terms of the dealsthat banks will offer because they will change the level of actualcapital the banks need to hold.

T&R: Are there any steps thatcorporate banking customers could be taking now to prepare forchanges that may be coming from their banks as a result of allthese new regulations?

TS: Well, first they need to understandthat every bank will choose to respond in a different way to theincoming regulations. One example is the ways that banks arechanging the operating model for their internal treasury functions.Some of them are centralizing treasury, while others aredecentralizing, splitting their treasury function into severaldivisions.

The drive to optimize capital and optimize liquidity buffersmakes centralization seem appealing. But for some banks, thatappeal is overridden by the need to understand exactly how capitalis being used in the bank's different lines of business and how tooptimize funds transfer pricing. In the past, that was more in thebackground, but it's now a more critical part of capital planningand pricing decisions. For banks that put a high priority onunderstanding local regulations, decentralizing treasury may be thebest choice, despite pressures on capital, collateral, and thelike.

T&R: How does this affectcorporate banking clients?

TS: From the corporate point of view, itis important to understand how the bank is going to change tocomply with these regulations. Are they going to be members of aCCP [central counterparty]? If so, what facilities are they goingto offer? For instance, a bank could offer clearing facilities toprovide a better pricing structure to their corporate clients. Itcould also offer more optimized terms for using CSAs [creditsupport annexes] and other structured deals to ensure thateverybody benefits through lower prices for the corporate clientsand minimum capital for the banks.

Banks that aren't CCP members will be affected, as well. Theymight find it more difficult to make money in certain products, sothey may now be considering whether to pull out of certain productsthat they were previously planning to offer. Companies need tounderstand their banking counterparties, where they are moving, andwhether they will continue to be major players in the products intheir current portfolio.

T&R: Should corporate treasurersjust sit down and talk to their banks about where they'regoing?

TS: That is the obvious way to respond.But a best practice, particularly for large companies, is to take aproactive approach to monitoring and assessing their bankingcounterparties. Some treasury departments in large corporations areoffering an educational program to help treasury and financeemployees understand the impacts of the regulations. They havereviewed their major products and major exposures, at least, andthey keep abreast of all the changes. How sophisticated and howcomprehensive this type of program needs to be varies from companyto company.

T&R: To what degree should acompany formalize the process of monitoring its banks' plans tochange their product offerings and business lines?

TS: Companiesshould monitor this on a regular basis. If we look at the horizonof upcoming regulations, not even the banks know right now howthey're going to respond. There is a lot of ambiguity anduncertainty, and as banks absorb the full impacts of the newregulations on their business model, their plans might continue tochange. Corporate banking clients should really monitor their bankslike they monitor their clients, asking: What's the current state?What is the strategy? Where are they going? They need to track howthe banks respond to all the different aspects of emergingrisks.

For example, it makes sense for companies to monitor theirbanks' liquidity spreads. We have seen banks' funding spreads widendue to ratings downgrades and country spreads. That might increasethe funding price, which ultimately might lead a corporate treasuryfunction to conclude that it makes sense to go directly to thecapital markets, rather than working through the traditionalchannels of relationships with banks.

T&R: In the leading-edgecompanies that are effectively monitoring their banks and providingtraining to employees, where does this type of initiativeoriginate?

TS: In some cases, banks will help theirbest customers with the training, but usually it originates in thecompany's C-suite. When we talk about the C-suite, obviously, thethree main stakeholders are the risk management and treasuryfunctions, and the business lines. Treasury needs to manageliquidity exposures, as well as the pricing and impact ofdeals.

Ultimately, the treasury department needs to work with riskmanagers and others in the organization to make sure that thecompany monitors counterparty risk in financial transactions, andthat the process for doing that incorporates insights into how thebank is responding to new regulations, and how it plans to respondin the future.