Liquidity Coverage Ratio LCR BASEL III Overview Kevin

Liquidity Coverage Ratio (LCR) BASEL III Overview Kevin Grabowski– Global Product Manager Ph. 704 -715 -7444 Kevin. Grabowski@wellsfargo. com Cathy Bader- Treasury Product Consulting Mgr. Ph. 336 -732 -6561 Cathy. Bader@wellsfargo. com March 16 th, 2016 © 2016 Wells Fargo Bank, N. A. All rights reserved. For public use.

BASEL III /Liquidity Coverage Ratio BASEL III is a comprehensive set of reform measures designed to improve the regulation, supervision and risk management within the banking sector § Internationally agreed upon measures will strengthen risk weighted capital requirements § Introduced two new standards; Leverage Ratio and LCR § Designed to ensure banks have adequate capital and stable sources of funding to withstand a crisis Limit systematic risk The regulations will have an impact on banks and their clients § Customers can expect: – A push for deeper relationships from their bank including a mix of products and services – The market adapting to provide new and different banking services – Competition for LCR ‘friendly’ deposits Source: Basel Committee on Banking Supervision, Bank of International Settlements, BOAML 1

BASEL III /Liquidity Coverage Ratio The LCR is a component of the Basel III liquidity standards. § It is a measure requiring banks to hold High Quality Liquid Assets (HQLA) at least equal to projected net cash outflows over a 30 day macro stress scenario § The objective of the new capital rules and specifically the LCR is: – To improve institutions ability to withstand periods of economic stress and function as financial intermediaries during those periods – Better reflect an institutions risk profile Net cash outflows include HQLA includes § Deposit run-off § Funding of undrawn credit / liquidity facilities § Funding of contingent liabilities § Cash & cash equivalents § Agency securities § IG corporate bonds Source: OCC, Federal Reserve Board, FDIC 2

How is the Liquidity Coverage Ratio calculated? The intent of the LCR is to ensure that banks remain liquid in a period of stress by requiring banks to hold HQLA against customer deposits High Quality Liquid Assets Projected Net Cash Outflows Liquidity Coverage Ratio $90 B* $100 B* 90%* Numerator Denominator 100% by Jan 2017 The bank should have enough high quality liquid assets to cover projected net cash outflows. Different types of deposits have different run-off assumptions. High Quality Liquid Assets Projected Net Cash Outflows Level 1 Assets Cash & Treasuries $60 B* Retail Consumer & Business customer (<=$1. 5 MM in balances) $60 B* Level 2 A Assets Agency Mortgage Backed Securities (can be no more that 40% of total) $20 B* Wholesale Business customer (>$1. 5 MM in balances) $40 B* Level 2 B Assets Investment Grade Corporate Bonds & Select Common Stock $10 B* *Numbers are for illustration purpose only 3

Operational versus non-operational deposits § All depository institutions will evaluate their portfolio to determine whether a deposit is deemed Operational or Non-Operational § Operational deposits provide added value to the overall organization § – Defined as “fully transactional; sticky money” – Used to fund customers key operating activities Non-operational deposits require banks to hold more HQLA – § Higher runoff factors than operational balances; greater likelihood of being drawn down in a period of financial crisis Deposits must pass a series of tests in order to be deemed Operational* – Switching cost test: ease of which to exit cash management services in 30 -days – Market rate test: alignment of customer rates with the “market” – Operational services test: number of cash management products tied to a deposit *All FI’s have created their own tests based on the regulation; there is no one size fits all 4

Deposit Outflow Factors Expected cash outflow is determined by multiplying balances levels by the outflow factor. Customer type or Counterparty determines the rate applied. Source: OCC, Federal Reserve Board, FDIC 5

Unfunded commitments attract an LCR outflow (and cost) What credit products are currently in scope? § Unfunded credit facilities: – § § Availability under general working capital facilities (e. g. , revolving credit lines) Liquidity facilities: – Commercial paper (CP) backup facilities – Assumes CP issuers lose access to shortterm CP funds and have to turn to Bank liquidity facilities – Variable rate demand obligations (VRDOs) • Standby bond purchase agreements - Put feature allows the investor to put the obligation back to the issuer/financial intermediary • Direct Pay LCs – liquidity facility that can be drawn on to pay bondholders if the underlying issuer is unable to fulfill its obligation Facilities not currently receiving a run-off %: – Standby Performance & Financial LCs – Trade LCs – Fully funded loans 6

LCR – Customer impacts § Media reports on the impacts of LCR to the banking industry have fully caught the attention of our customers. – Introduction of new deposit or TM fees to keep account open – Shedding 100% runoff deposits altogether – Some banks are still offering bids or rates well above (below) competitor price points § Customers are getting conflicting and confusing messages/proposals all for the same piece of business. – Due to ambiguity of the rules; interpretation – Looking for insight and guidance from their bank – impacts new and existing customers 7

LCR – What can customers expect? Started our conversation today with the following: § Push for deeper relationships from their bank including a mix of products and services – § The market adapting to provide new and different banking services – § Deepening client relationships make it more difficult for customers to take their cash management business and related deposits to a competitor; retaining/expanding these relationships is a key to maximizing operational deposits New deposit products are being developed to minimize the HQLA banks need to hold especially for 100% runoff counterparty types Competition for LCR ‘friendly’ deposits – Each bank is looking at their balance sheet mix and the types of clients they do business with. For those looking to recalibrate with more LCR favorable deposits, there will be institutions who are very aggressive with rates and prices offered to particular customer types 8

Appendix 9

Appendix – U. S. Operational Deposit Definition § Definition – Unsecured wholesale funding that is required for the bank to provide operational services as an independent third-party intermediary to a wholesale customer § In order for deposits to be considered “operational” they must: 1. Be held pursuant to a legally binding written agreement, the termination of which is subject to a minimum 30 -day notice period or significant termination costs are borne by the customer 2. Not have significant volatility in the average balance of the deposit 3. Be held in an account designated as an operational account 4. Be maintained at a bank for the primary purpose of obtaining operational services 5. Not be designed to create an economic incentive for the customer to maintain excess funds therein through increased revenue, reduction in fees, or other offered economic incentives 6. Demonstrate the deposit is empirically linked to operational services and there is a methodology for any excess amounts (excess amounts need to be excluded) 7. Not be provided in connection with the bank’s provision of operational services to an investment company, non-regulated fund, or investment adviser 8. Not be for correspondent banking arrangements pursuant to which the bank (as correspondent) holds deposits owned by another depository institution bank (as respondent) Source: OCC, Federal Reserve Board, FDIC 10

Appendix – Wholesale Counterparty Types § Mortgage Escrow – Not technically a counterparty type; 25% prescribed outflow. No need to determine operational vs. non-operational § Public Sector Entity – A state, local authority, or other governmental subdivision below the sovereign entity level § US GSE – An entity established or chartered by the Federal government to serve public purposes specified by the United States Congress, but whose debt obligations are not explicitly guaranteed by the full faith and credit of the United States government. For example, FHLMC, FNMA, FHLBs, Farm Credit § Sovereign Entity – Central Government, Agency, Department, Ministry, or Central Bank of a Central Government. Includes GNMA and other Government Guaranteed Entities § Multilateral Development Bank – 15 named institutions plus any other entity that provides financing for national or regional development in which the U. S. government is a shareholder or contributing member § Bank – Bank, Credit Union, Foreign Bank, Depository Institution, Industrial Bank, Bank Holding Company, Covered Depository Institution Holding Company, Saving and Loan Holding Company, Industrial Loan Company § Non-Bank Financial Institution – Insurance Company, Securities Holding Company, Broker or Dealer, Futures Commission Merchant, Swap Dealer, Security-based Swap Dealer, Designated Financial Market Utility Source: OCC, Federal Reserve Board, FDIC 11

Appendix – Wholesale Counterparty Types § Pension Fund – Employee benefit plan as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974 (29 U. S. C. 1001 et seq. ), a “governmental plan” (as defined in 29 U. S. C. 1002(32)) that complies with the tax deferral qualification requirements provided in the Internal Revenue Code, or any similar employee benefit plan established under the laws of a foreign jurisdiction § Investment Adviser – A company registered with the SEC as an investment adviser under the Investment Advisers Act of 1940 (15 U. S. C. 80 b-1 et seq. ), or foreign equivalents of such company § Investment Company – A company registered with the SEC under the Investment Company Act of 1940 (15 U. S. C. 80 a-1 et seq. ) or foreign equivalents of such company (Money Market Funds and Mutual Funds. ) § Non-Regulated Fund – Any hedge fund or private equity fund whose investment adviser is required to file SEC Form PF (Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors), and any consolidated subsidiary of such fund, other than a small business investment company as defined in section 102 of the Small Business Investment Act of 1958 (15 U. S. C. 661 et seq. ) § Special Purpose Entity – A company organized for a specific purpose, the activities of which are significantly limited to those appropriate to accomplish a specific purpose, and the structure of which is intended to isolate the credit risk of the special purpose entity § Non-Financial Corporate – All other entities Source: OCC, Federal Reserve Board, FDIC 12