US and Japanese corporate cash levels surged in the last half of 2013 as did bank reserve balances at those countries’ central banks, rapid shifts that illustrate the uncertainty facing corporate finance executives.
Opening up consultancy Treasury Strategies’ Quarterly Corporate Cash Briefing, partner Tony Carfang said that US corporate cash levels spiked 6.6 percent by the end of the third quarter, to $1.93 trillion, the highest level ever recorded. Corporate cash levels in the U.K. and Eurozone, instead, ascended more gradually and actually declined a bit, while the cash level among Japanese corporations was relatively flat in the second and third quarters after ramping up significantly since the throes of the financial crisis.
In absolute terms, Treasury Strategies’ corporate cash indices for the US, U.K. and Eurozone have doubled since 2000, and after diverging starting midway through 2005 they now appear to be converging, while Japan’s has remained relatively flat, increasing only in the last few years. The percentage of corporate cash held by a an economic zone’s companies relative to its GDP bumped up in the US to 11 percent from 9 percent, and by nearly 50 percent in the Eurozone, to 20 percent from 14 percent. The U.K. saw a bigger absolute jump, to 32 percent from 25 percent, and Japanese corporates jumped to the highest level, to 49 percent from 36 percent.
Mr. Carfang said the U.K. level was likely high because of its status as an international banking center, with lots of bank funds parked there. He added Treasury Strategies is still exploring why Japan’s level is so high, and he hypothesized one reason may be that Japanese banks have a lot of cash sitting on their corporate balance sheets.
“And maybe global corporations are using Japan as a regional treasury center, so a lot of cash resides there for that reason,” Mr. Carfang said.
Meanwhile the bank reserve balances at the Federal Reserve and the Bank of Japan have jumped sharply since the end of 2012, while the Bank of England’s increased less and the European Central Bank’s actually fell. Mr. Carfang noted that the central banks seeing the largest reserve-balance increases have also most aggressively pursued quantitative easing strategies.
In the US, he said, bank reserve balances at the Federal Reserve rose to $2.25 trillion from $1.5 trillion over the nine-month period through the end of the third quarter, or a bit over $82 billion per month.
“I think it’s no coincidence that the Federal Reserve was buying $85 billion per month of securities in the market. It may indicate … the money the Fed is creating has absolutely no where to go and comes directly back onto its balance sheet,” Mr. Carfang said, adding, “If that is the case, it’s certainly an issue for monetary policy and what is really the economic purpose behind this cash merry-go-round.”
From the standpoint of corporate treasuries, said Mr. Carfang, such large numbers and their rapid changes represent a significant challenge in terms of planning balance sheets and cash management.
“When so much of what’s happening in the market today is being determined by central bank policy … the level of rates, the amount of liquidity … that creates an unknown in the minds of corporate treasurers and CFOs.