Spring 2015 3

Basel III gives less complex banks competitive advantage !"#$%&'()*+%,'%-'!(+%!$$*,$%."%)!$*%'&%)(.$.$%/.,-+(!/!0$%

While 2007’s !nancial

crisis may seem a long

time ago, its regulatory

consequences for banks

and their hedge fund

clients are just beginning. As the Basel III

reforms start to impact banks, the largest

and most complex are closing hedge funds’

deposit accounts or imposing fees on what

were previously free accounts.

At least !ve major banks are urging clients

– including hedge funds – to park their cash

elsewhere, according to news reports. What’s

more, some of them are telling clients that

they will be charging fees on accounts that

were previously free.

Yet the more risk averse and less complex

banks, that are not feeling the regulatory

pressure to the same extent, are continuing

to welcome funds on deposit.

As a result, a two-tier banking system

is developing, with the major banks being

forced to turn away some less pro!table

types of business, and the simpler banks

continuing to o"er a full service for clients

such as hedge funds.

Capital pressures

#e Basel III rules driving the major banks’

change in approach require them to stockpile

enough assets that could easily be converted

into cash to cover a deposit $ight in a crisis.

Because big, uninsured deposits are viewed

as more susceptible to fast withdrawal, banks

would need to bolster reserves held against

these deposits rather than pursue pro!table

investments.

#e major banks with complex balance

sheets have reacted by looking closely at

their customer base. Many hedge funds have

already seen fees rise signi!cantly and, in

some cases, banks have asked them to move

their deposit accounts elsewhere.

When it comes to prime brokerage activi-

ties, banks are under similar balance sheet

pressures. So costs are rising and banks

view low-yielding assets, such as unencum-

bered overnight deposits as increasingly

unattractive.

Administrative issues

For fund managers there is one further

implication of Basel III from an administra-

tion perspective: bank investors in hedge

funds need summary level information about

their hedge fund investments in order to

reduce capital charges.

Information typically includes risk

notionals bucketed by long/short, instru-

ment type, maturity and credit rating. Each

institutional investor has developed its own

Basel template to receive this information in

a consistent format on a quarterly basis.

Fund administrators can help managers

to !ll out the numerous templates because

they have the information and systems

to generate custom extracts for each bank

investor.

When reviewing banking relationships in a

post-Basel III world, fund managers need to

understand what type of business consumes

bank capital. Understanding this will help

fund managers to decide which banks are

most suited to their business. Above all,

they may wish to remember that in banking

simplicity has become a great attribute.

by Kieran Dolan, Managing Director, Citco Alternative Investor Services kdolan@citco.com

“ Risk averse

and less

complex

banks still

welcome

funds on

deposit”

Basel III: a primer

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