In the current environment, placing some funds in Notice Saver accounts may appeal to some investors who don’t need immediate access to all their cash holdings and can tolerate short notice periods to access some of their funds.
Notice Saver accounts are accounts that pay a floating rate of interest (usually calculated daily) on the deposited funds. Investors can keep adding money to the account however funds can only be withdrawn after providing “notice” of a withdrawal and serving the prescribed notice period. Notice Saver accounts are not as easily accessible as at call savings accounts, but investors have more flexibility than with a term deposit as funds are accessible after giving notice (whereas withdrawing part or all of your term deposit before maturity usually comes at a cost – penalty interest and withdrawal is at the bank’s discretion usually requiring 31 days’ notice anyway).
The notice period varies between different Notice Saver accounts and depends on the notice period selected when the account is opened. However, the notice period is always 31 days or longer. The interest rate paid is generally tiered depending on the notice period. This means in general the longer the notice period the higher the interest rate paid both before notice is given on the account and afterwards during the notice period.
Benefits to Banks and Investors
For banks, the main advantage of Notice Saver accounts is monies cannot be withdrawn earlier than the notice period so these deposit accounts provide stable funding for regulatory purposes. APRA imposes on ADI’s a Liquidity Coverage Ratio (LCR) requirement which compels them to hold High Quality Liquid Assets (HQLA) at least equal to their expected net cash outflows over a 30-day stress or “bank run” scenario meaning banks are incentivised to seek funding longer than 30 days. Holding customer deposits that mature more than 30 days in the future is of greater benefit to financial institutions as these deposits are excluded from the LCR calculation and do not have to be offset with lower yielding assets.
In contrast holding wholesale deposits maturing within 30 days and at call (on demand) deposits from larger institutions (particularly those categorised as financial institutions) require ADIs to hold HQLA to offset the risks. HQLA is limited to cash, reserves held with the RBA and Australian government or semi-government securities. These assets have lower expected rates of return for banks compared with other assets such as loans. Banks are therefore highly motivated for financial efficiency reasons to minimise their HQLA holdings and therefore the liabilities that require them to hold HQLA as an offset.
The Notice Saver accounts are a minor regulatory arbitrage allowing banks to pay higher interest in the period before the customer gives notice as during this period the ADI enjoys the regulatory benefit that monies do not have to be repaid to customers for at least 31 days. The rate then falls when the customer gives notice as the bank will lose the regulatory benefit of the deposit as it will need to be repaid to the customer within 31 days. Rates prior to the notice period are often higher than say a 90 day Term Deposit because such an instrument only provides regulatory benefit for 60 of the 90 days as in the last 30 days before maturity the deposit enters the LCR calculation.
For investors, the major benefits are some flexibility in accessing monies with a defined notice period and the guaranteed liquidity (liquidity in the sense of not simply being able to redeem the investments for cash after the notice period, but also not to suffer a capital loss when doing so).
For investors looking to earn higher interest rates by investing longer term, an issue has always been liquidity. This can either come in one of two forms: either the asset is held to maturity and redeemed or it is sold in the secondary market. Unless the investment portfolio is well structured it is often very difficult to meet most investors’ liquidity needs simply through the maturity profile of the investments unless all the investments are short term. In volatile markets, asset prices often fall and so although longer dated securities may be tradeable as promised by brokers, if the funds need to be redeemed, this can often only be done by incurring a large capital loss which is often financially painful for the investing organisation.
A Notice Saver account gives guaranteed and known liquidity without any uncertainty introduced by sales into an unpredictable secondary market. Investors know they can access the monies in full and without capital loss at the end of the notice period (unless the borrower defaults). For investors it then becomes simply a question of managing cash needs; i.e. the amount of funds needed within more or less than 30 days, 60 days etc. For most investors, careful consideration and analysis of their needs will show that only a portion of their investment portfolio will need to be accessed in less than 90 days (or 60 days or 30 days). Similarly, by liaising with other areas of their organisations, finance departments can perhaps get at least 31 days’ notice of impending large cash outflows in which case Notice Saver accounts are far more valuable.
If investors are able to forecast some of their cash flow needs and if the interest rates on the Notice Saver accounts are competitive with other short to medium term investments, then Notice Saver accounts may have some significant benefits to some investors.
We encourage investors to contact us if they wish to know more about Notice Saver accounts and to explore if this product is right for them. There are a number of different products on the market so often one organisation’s products may be more suitable than another to meet a specific investor’s needs.