The Calm Before Reform

With sweeping new legislation on the horizon, companies (and their banks) try to gauge the impact.

Questions about Reg Q

In the aftermath of the stock-market crash of 1929, Congress passed a law — Regulation Q — prohibiting banks from paying interest on business checking accounts. The Dodd-Frank Act cancels it, with implications good and bad for bank customers. On the plus side, it provides an opportunity for corporate customers to earn interest on their deposit accounts. But like so much else with
Dodd-Frank, that comes with consequences.

“Repealing Regulation Q raises the cost of funds for banks,” says Laurie McCulley, managing director at Chicago-based consulting firm Treasury Strategies Inc. “They’ll have to find a way to make up for that, which may translate into higher service fees for corporations.”

Corporate treasurers, McCulley says, will need to weigh interest-on-checking offers from their banks against alternatives they have used in the past to earn interest on cash, such as having balances swept nightly into a money-market fund or offshore Eurodollar account. If they decide to leave cash with their bank, she adds, they’ll need to calculate how much additional counterparty risk they’re taking on as a result.

“Bank deposits are already at an all-time high of $1.3 trillion in corporate and commercial deposits,” McCulley says. “One of the lessons learned from the financial crisis of 2008–2009 was that companies had taken too narrow a view of counterparty risk.”

McCulley notes that the repeal of Reg Q and the increased FDIC and reserve-requirement burden on banks will complicate the bank service-fee model for corporations. The earnings credit in soft dollars historically applied to balances in lieu of interest may now look less attractive or different on a bank-by-bank basis. “Corporations and treasurers will have to look much more carefully at their account analysis statements. The ECR rates, interest rates, and FDIC fees will change and the mix applied to other balances will be more complex in this new era,” she points out.

Managing Credit Facilities

The Dodd-Frank Act requires that banks spin off their riskier derivatives activities into separately capitalized affiliates; this includes their commodity, agriculture, and energy derivatives businesses. This could complicate life for corporate treasurers on a seemingly unrelated front, the negotiation of bank credit facilities, warns Ann Svoboda, author of Actual Cash Flow and Americas treasurer for British confectioner Cadbury Plc until its recent acquisition by $40.2 billion Kraft Foods Inc.

“When you get credit and arrange your capital structure as a global corporation, you’re trying to divvy up which banks you get your credit from in relation to the services they provide,” explains Svoboda, who, as a member of the FEI Committee on Corporate Treasury, lobbied Congress as it drafted Dodd-Frank. “If banks need to segregate their services so that it is harder for them to provide you with what you need, that will make it harder for corporations to do the fee-for-credit calculation. That might result in having more counterparties, or in having different counterparties. It’s hard to know.”


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