Executive View: Greg Kavanaugh, Bank of America Merrill Lynch

Published: Nov 2014
Greg Kavanaugh hero image

Greg Kavanaugh talks about the impact of Basel III on banks and corporates, the challenges of investing in a low-yield environment, and the changing nature of the bank-client relationship.

Greg Kavanaugh

Global Head
Liquidity & Investments

Published: November 2014


Greg Kavanaugh heads up Global Liquidity Investment Solutions and Revenue Management for Bank of America Merrill Lynch Global Transaction Services. He leads Global Liquidity Product Management, Investment Sales and Revenue Management and also manages a team of short-term fixed-income professionals supporting corporate and commercial clients in the US, Latin American and EMEA, with further responsibility for revenue management within Global Transaction Services.

Kavanaugh joined Bank of America in May of 2007 as head of Treasury Services Revenue Management group, adding Global Liquidity responsibilities in early 2008. He has a Master’s of Management degree in Marketing and Strategy and a bachelor’s degree in Accounting.

It appears that the regulations within Basel III could have a compound effect for banks and corporates, how do you see this playing out over time?

New regulations under Basel III seek to strengthen the global financial system through the new capital adequacy measures under the leverage ratio, and coverage of cash outflows that may be withdrawn in a crisis stipulated by the Liquidity Coverage Ratio (LCR). The combined impact is expected to increase banks’ costs of holding High Quality Liquid Assets (HQLA) required for certain types of deposits under LCR. As a result, corporations that leverage banks for single transactions, such as a deposit or credit facility, may find these transactions could be re-priced. On the other hand, the deepest corporate-bank relationship should feel little to no other impacts from these regulations. Therefore, over time we could see corporations reducing the number of banking relationships to obtain the most favourable pricing for their services.

Do you see any unintended impact at work between the effective devaluation of some deposits under Basel III, and the effect of pending money market fund (MMF) reform?

MMF reform for institutional prime and institutional municipal funds stipulates that a floating net asset value (NAV), which is based on the market price of funds’ holdings, will replace the stable $1.00 per share NAV. While there is a two-year lead time to implement, this change will in effect lower the demand for what has been viewed as a desirable option for clients’ excess cash. At the same time, MMFs have historically been considered a critical alternative for deposit balances, particularly those viewed as less desirable for banks under Basel III.

For banks, LCR will lessen the desirability of certain deposits, while corporate demand for MMFs may lessen as well. To support their clients, banks are likely to develop new products that are more favourable under LCR – appealing to both the corporates and their banks. However, corporates may opt to invest on their own into securities, or use an investment professional to work on solutions such as separately managed accounts [SMAs], where they have a significant amount of cash to justify a bespoke investment product. Finally, others may just accept lower returns.

The number one goal for corporate treasurers is return of capital versus return on capital, so it becomes absolutely critical for them to work with investment professionals when updating their investment policies and balancing the right risk with reward. But in this context they should also be more closely managing their working capital and cash flow as it becomes less fungible.

We are in the midst of a sustained low interest rate environment where earlier this year the ECB deposit rates went negative. What does this mean for corporates?

The confluence of the changing regulatory environment, and the low or negative interest rate environment, makes it much more difficult to manage cash – namely because it is difficult for banks to price in enough spread to offset the cost of deposits, and for corporates to have any kind of robust return on their cash. Even a corporate that is aggressive at identifying and managing operating cash, reserve/core cash, and strategic cash, will realise this approach may not be as effective when presented with a flat yield curve. And as long as we have tough economic conditions in Europe, the ECB is unlikely to raise rates. Whether this negative rate environment filters through to corporates’ pricing depends on how low rates go, and the duration. Corporates with deep bank relationships will not likely see extra costs being passed on to them in the near term, but could over time. Until rates rise, corporates should be revisiting their cash forecasting routines and investigating the use, where possible, of banking tools such as sweeping and pooling, to facilitate cash optimisation.

What opportunities with respect to cash optimisation are offered by the progressive deregulation of renminbi?

China has made a lot of moves towards internationalisation of RMB, and now, with cross-border and two-way sweeping, there is a great opportunity for corporates to look at how they structure and leverage their regional working capital. With freer movement of cash, it affords them more efficient working capital, which will lower their cost of borrowing and FX costs. Indirectly, it may allow more flexibility in their supply-chain management around currency-based negotiation of terms.

Wherever these opportunities exist – although ultimately it must always fall to the corporate to do its homework on aspects such as taxation, it will be important for that business to engage with its core banking providers best able to offer a full understanding of ‘the lay of the land’, and hence the most appropriate local solutions.

How have targeted currency controls and sanctions affected bank-client relations?

We are seeing a trend towards more sanctions and targeted currency controls, which are increasingly being viewed as the most effective tools in the management of geopolitical tensions. This can put financial intermediaries in the ‘cross-hairs’, as we must comply with sanctions, and measures against anti-money laundering, anti-corruption, bribery and so on, and the impact they will have on us and our clients. To be able to implement an effective compliance policy around these measures, corporates must have a full understanding of the requirements for opening accounts and executing transactions, for example, and banks are naturally well-positioned to advise on such matters.

Has the nature of the bank-client relationship changed as a result of the new regulatory environment?

In some areas – such as Basel III – we expect to move beyond regulatory promulgation towards implementation, and in this context, deeper corporate-bank relationships are beneficial for all. Banks with corporate and FI clients across the globe have a wealth of information to share and will spend a lot of time being the ‘value-added’ provider, just as corporates work with different banks across the regions and may too share their experiences. Corporates know they have to do their homework around regulation, but the changes are driving a more consultative bank approach; where deeper relationships have been forged, it is easier to navigate that changing environment.


“Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and members of SIPC, and, in other jurisdictions, by locally registered entities. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC and are members of the NFA. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured • May Lose Value • Are Not Bank Guaranteed. ©2014 Bank of America Corporation

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