BASEL III

1. BASEL III A NEW PHASE OF LIQUIDITY MANAGEMENT FOR FINANCIAL INSTITUTIONS? Kevin Wong, DirectorClient Insights & SolutionsInternational & Institutional Banking 23 February 2015

2. Background: the Basel III response to the GFC In the view of banking regulators, the GFC exposed several key weaknesses in the global banking industry – capital, liquidity and leverage • Basel III is a complex, multi-faceted, multi-staged set of banking regulatory reforms • Global ‘base’ rules, but national differences • Milestones • 1 Jan 2013: Capital – quantity and quality • 1 Jan 2015: Liquidity Coverage Ratio (LCR) – short term liquidity • 1 Jan 2018: Net Stable Funding Ratio (NSFR) – longer term liquidity/’match funding’ • 1 Jan 2018: Leverage Ratio – on- and off-balance sheet leverage • Direct impact on banks; indirect impact on bank customers, counterparties and investors

3. Liquidity Coverage Ratio (LCR) The new LCR framework took effect from 1 Jan 2015. The objective is to ensure that banks have sufficient, high quality liquid assets in an acute short-term liquidity stress scenario High Quality Liquid Assets (HQLA) Net cash outflows (30 days) ≥ 100% • Stress scenario is for a 30 day period • HQLA comprises essentially cash, RBA reserves and govt/semi-govt bonds in Australia • High quality but low yields • Net cash outflows represent highly prescriptive ‘run off’ assumptions across different funding liabilities of a bank • Framework applies to larger/more sophisticated banks/ADIs, but the practical scope seems broader

4. Run-off assumptions - retail vs. wholesale funding In the eyes of banking regulators, retail deposits are ‘stickiest’ while wholesale financial institution deposits are considered the least ‘sticky’ • To illustrate – deposits with effective maturity of ≤30 days: • In other words, a bank has to hold: • $0.05-0.10 in cash/RBA reserves/govt bonds for a $1.00 Retail deposit vs. • $0.40 in HQLA for a $1.00 wholesale non-FI deposit vs. • $1.00 in HQLA for a $1.00 wholesale FI deposit 4-8x 2.5x

5. So what are banks’ preferences under LCR? It’s worth thinking about this from a time perspective… … and from a client category perspective 0-30 days 31 days –up to 364 days 1 year+  • Retail/SME • Wholesale Operational – FI and non-FI • Wholesale – non-FI • Wholesale – FI • Banks are becoming more granular in viewing and differentiating client deposits • Segment prioritisation • Rates offered  • Term deposits of at least 31 days BUT: • Evergreen/rolling is better • Notice period is better • Longer term is better • 12 months+ is also a consideration as banks consider future regulatory reform on term/match funding • 6 months+ may provide additional bank benefit from a regulatory perspective vs <6 months? • Watch this space…  

6. The decision tree on FI deposits Is remaining tenor ≤30 days? 0% Run-Off NO What is a “Financial Institution”? “… includes any institution engaged substantively in one or more of the following activities – banking; leasing; issuing credit cards; portfolio management (including asset management and funds management); management of securitisation schemes; equity and/or debt securities, futures and commodity trading and broking; custodial and safekeeping services; insurance (both general and life) and similar activities that are ancillary to the conduct of these activities. A financial institution includes any authorised NOHC or overseas equivalent” “For the avoidance of doubt, this definition includes money market corporations, finance companies, friendly societies and the trustees of superannuation/pension funds, public unit trusts/mutual funds and cash management trusts” YES Is deposit from a Financial Institution (FI)? YES Retail ‘look-through’ treatment – FI intermediary has no obligation/ability to act without retail clients’ instructions Are withdrawal /deposit decisions made by the underlying retail customer? YES NO [25%] Run-Off Is deposit on a transactional platform and required for company operations? Only that portion of the deposit proven to serve operational needs can qualify as stable YES NO YES 100% Run-Off 25% Run-Off

7. Intermediated deposits Subject to strict criteria, APRA will recognise certain retail deposits on wholesale intermediary platforms as “retail” for purposes of the Basel III LCR framework • Extract re “intermediated deposits” from APRA banking prudential standard APS 210 – Liquidity:

8. A new phase of liquidity management? Both clients’ and banks’ objectives can be better aligned with the appropriate cash management solutions Funding liability run-off requirements Liquidity needs BANK CUSTOMERS Term funding Yield benchmark Customer relationship and franchise Consistency of returns Full service bank Diversity of provider and counterparties Return on capital Overall banking needs

9. 9 AUDIENCE QUESTIONS

10. Audience question 1 Q. How do you prioritise the following objectives for cash management? (Rank from most to least important) • Liquidity • Yield • Consistency of yield • Diversity of provider

11. Audience question 2 Q. What have you seen happen in rates offered by banks for your cash management/deposit needs over the past six months? Increased Decreased Steady

12. Audience question 3 Q. What do you anticipate will happen to cash management/deposit rates offered by banks over 2015? Increase Decrease Steady

13. Audience question 4 Q. For super fund members that specifically leave money within the Cash option, what do you believe they are primarily focused on? Capital preservation Liquidity Certainty of returns Maximising cash returns

14. Audience question 5 Q. With a low rate environment persisting, what would you consider for enhancing cash returns? (Rank from most to least relevant) Longer dated term deposits More structured deposit products – e.g. notice period, rolling term deposits Include non-cash, liquid investments – e.g. bank paper Business model change – e.g. introduce member/intermediary platform

15. DISCLAIMER AND CONFIDENTIALITY IMPORTANT NOTICE: The document may be restricted by law in certain jurisdictions. Persons who receive this document must inform themselves about and observe all relevant restrictions. 1. Disclaimer for all jurisdictions Except if otherwise specified in section 2 below, this document is issued and distributed in your country/region by Australia and New Zealand Banking Group Limited (ABN11 005 357 522) (“ANZ”), on the basis that it is only for the information of the specified recipient or permitted user of the relevant website (collectively, “recipient”). This document may not be reproduced, distributed or published by any recipient for any purpose. It is general information and has been prepared without taking into account the objectives, financial situation or needs of any person. Nothing in this document is intended to be an offer to sell, or a solicitation of an offer to buy, any product, security, instrument or investment, to effect any transaction or to conclude any legal act of any kind. If, despite the foregoing, any services or products referred to in this document are deemed to be offered in the jurisdiction in which this document is received or accessed, no such service or product is intended for nor available to persons resident in that jurisdiction if it would be contradictory to local law or regulation. Such local laws, regulations and other limitations always apply with non-exclusive jurisdiction of local courts. Before making an investment decision, recipients should seek independent financial, legal, tax and other relevant advice having regard to their particular circumstances.  The views and recommendations expressed in this document are the author’s. They are based on information known by the author and on sources which the author believes to be reliable, but may involve material elements of subjective judgement and analysis. Unless specifically stated otherwise: they are current on the date of this document and are subject to change without notice; and, all price information is indicative only. Any of the views and recommendations which comprise estimates, forecasts or other projections, are subject to significant uncertainties and contingencies that cannot reasonably be anticipated. On this basis, such views and recommendations may not always be achieved or prove to be correct. Indications of past performance in this document will not necessarily be repeated in the future. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. Additionally, this document may contain ‘forward looking statements’. Actual events or results or actual performance may differ materially from those reflected or contemplated in such forward looking statements. All investments entail a risk and may result in both profits and losses. Foreign currency rates of exchange may adversely affect the value, price or income of any products or services described in this document. The products and services described in this document are not suitable for all investors, and transacting in these products or services may be considered risky. ANZ and its related bodies corporate and affiliates, and the officers, employees, contractors and agents of each of them (including the author) (“Affiliates”), do not make any representation as to the accuracy, completeness or currency of the views or recommendations expressed in this document. Neither ANZ nor its Affiliates accept any responsibility to inform you of any matter that subsequently comes to their notice, which may affect the accuracy, completeness or currency of the information in this document. Except as required by law, and only to the extent so required: neither ANZ nor its Affiliates warrant or guarantee the performance of any of the products or services described in this document or any return on any associated investment; and, ANZ and its Affiliates expressly disclaim any responsibility and shall not be liable for any loss, damage, claim, liability, proceedings, cost or expense (“Liability”) arising directly or indirectly and whether in tort (including negligence), contract, equity or otherwise out of or in connection with this document. If this document has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. ANZ and its Affiliates do not accept any Liability as a result of electronic transmission of this document. ANZ and its Affiliates may have an interest in the subject matter of this document as follows: • They may receive fees from customers for dealing in the products or services described in this document, and their staff and introducers of business may share in such fees or receive a bonus that may be influenced by total sales. • They or their customers may have or have had interests or long or short positions in the products or services described in this document, and may at any time make purchases and/or sales in them as principal or agent. • They may act or have acted as market-maker in products described in this document. ANZ and its Affiliates may rely on information barriers and other arrangements to control the flow of information contained in one or more business areas within ANZ or within its Affiliates into other business areas of ANZ or of its Affiliates. Please contact your ANZ point of contact with any questions about this document including for further information on these disclosures of interest.  2. Country/region specific information: Australia. This document is distributed in Australia by ANZ. ANZ holds an Australian Financial Services licence no. 234527. A copy of ANZ's Financial Services Guide is available at http://www.anz.com/documents/AU/aboutANZ/FinancialServicesGuide.pdf and is available upon request from your ANZ point of contact. If trading strategies or recommendations are included in this document, they are solely for the information of ‘wholesale clients’ (as defined in section 761G of the Corporations Act 2001 Cth). Persons who receive this document must inform themselves about and observe all relevant restrictions.