Tuesday 17 February 2015 by Elizabeth Moran Opinion

Is it the end of the short term deposit?

A quiet but important regulatory change happened last month when APRA’s new Liquidity Coverage Ratio took effect, making it far more expensive for financial institutions to offer investors deposits of less than 30 days.

The change means that major and regional banks should start offering investors better rates on longer term deposits and 31 day notice saver accounts than on short term deposits.

The Liquidity Coverage Ratio, aims to make sure that an Authorised Deposit-taking Institution (ADI) can meet its liquidity requirements - in other words has enough cash available - in a severe stress or ‘bank run’ scenario.

The theory is that the bank is then less likely to need any taxpayer funded assistance. After all, these institutions are covered by the Commonwealth Government’s $250,000 deposit guarantee, effectively removing the risk to investors depositing funds of less than $250,000 and placing it on the government.

Under the new regulations, larger ADIs are required to hold high quality liquid assets, which typically have low returns, for any deposit which they must repay within 30 days. This makes these deposits ‘expensive’ for the ADI as it has to tie up a portion of its funds.

Conversely, a deposit that has a 31+ day break or notice period requires no backing under the Liquidity Coverage Ratio. As such, ADIs will pay higher rates to attract those funds. Traditional at-call and short-dated term deposits, particularly those placed by financial institutions, will receive the opposite treatment with rates expected to be significantly lower.

Aside from the lower rates for term deposits, we expect banks to make it harder for investors to break term deposits. For anyone investing in a new term deposit, it’s worth checking the break clause terms and conditions. We expect few exceptions with the main one being personal hardship.

However, the larger implications are for wholesale deposits and at-call money from larger institutions, particularly those classified as financial institutions. It is here where the traditional deposit product looks to be a dying breed, to be replaced by 31+ day break or notice period deposit products.

Compliance with the 100% LCR is only required from what APRA terms the ‘scenario analysis’ ADIs. This refers to the major and regional Australian banks and locally incorporated foreign subsidiary banks (such as HSBC Bank Australia Limited and Rabobank Australia Limited).

Credit unions, building societies and other mutual banks are not required to comply with the specific LCR.

There is already some evidence that notice saver accounts are offering better returns over term deposits. Rabobank is offering 3.65 per cent for a 31 day notice saver which increases to 3.70 per cent for a 60 day notice period and 3.75 per cent for 90 days.

One month term deposits are offering returns of around 2.6 percent, which increases to 2.75 per cent for six months and 3.3 per cent for a year.

One of the downsides with the notice saver accounts is that the advertised interest rates can change. AMP’s notice saver account currently pays 3.05 per cent but the bank is advertising that the rate will reduce to 2.95 per cent later this month; however, that rate still beats short-term, term deposits.

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