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Why Basel III Matters 

April 8, 2015

Bruce C. Lynn, CFO.com

One of the key differences between Basel III and the other Basel versions before it is the concept of liquidity management.

Under Basel III, banks must maintain certain levels of high- quality assets (government securities, for example) to offset the probability that a bank will experience “significant” cash outflows (of deposits, for instance) over a 30-day period, outflows which could jeopardizing its financial existence. While maintaining more high-quality assets can enhance the stability of a bank, the need for more assets means a bank will need to maintain or acquire expensive capital, potentially decreasing a bank’s overall profitability (its return on assets or equity).

To offset potential costs, some banks may choose to pass on costs to their customers. This “valuation decision” can depend on the level of a customer’s deposit balances and purpose. For example, funds on deposit by companies kept for “operational purposes” are more valuable to a bank because these deposits are considered more stable than “nonoperational” or “excess” deposits. A more stable deposit base means banks need to worry less and keep lower levels of high-quality assets.

Read more: CFO.com

 
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