TD market sea change reflects new liquidity rule

More than 20 authorised deposit-taking institutions have changed the conditions of their term deposit products and now require depositors to give 31 days notice if they wish get their cash out before the maturity date.

The change is in response to the introduction of a new liquidity coverage ratio requirement at the start of the year.

Under the new LCR rule, ADIs must maintain an adequate level of high-quality liquid assets that can be converted into cash to meet liquidity needs for 30 days.

To determine the appropriate LCR, banks must estimate their net cash outflow over 30 days under stressed conditions, with higher runoff rates to apply to less stable deposits. Retail deposits are divided into "stable" and "less stable" portfolios.

The Australian Prudential Regulation Authority's liquidity standard (APS 210) says: "Cash outflows related to fixed or term deposits with a residual maturity or withdrawal notice period of greater then 30 days will be excluded from LCR calculations if the depositor has no legal right to withdraw deposits within the 30-day horizon of the LCR."

This condition has pushed banks to target deposits that can't be withdrawn before 31 days.

Over the past couple of years, several ADIs, including RaboDirect, Investec and AMP Bank, have launched so-called notice accounts - which allow regular deposits and have no maturity date but require the depositor to give notice before making a withdrawal.

With the new rule taking effect on January 1, most other ADIs (including the Big Four) have simply changed the terms and conditions of their existing term deposit products.

In the past depositors could break the term and get their money out at short notice, usually paying a fee for the privilege. Now they must give 31 days notice, unless they face hardship.

ANZ has taken a different approach, offering depositors the choice of an Advance Notice Term Deposit or the standard ANZ Term Deposit. The Notice Term Deposit is paying ten basis points more on a given term. The bank is also offering a Business Notice Term Deposit.

An ANZ spokesperson said: "Standard term deposits currently remain open for sale while our customers adapt to the new features of the notice term deposit products."

There are a large number of ADIs that have not changed the conditions of their term deposit products. The LCR requirements only apply to ADIs that APRA designates as LCR ADIs - larger, more complex institutions.

Given that, there are some unusual inclusions in the list of ADIs that have made the change: Big Sky, Delphi Bank, Heritage Bank and Teachers Mutual Bank.

It will be interesting to see whether the market reacts to the change and savers give preference to ADIs that have not included a 31-day notice period in their term deposit conditions.