Corporates have been slow to move away from their banks’ time deposits despite the government revoking unlimited guarantees at the end of 2012. What many are doing instead is shifting deposits between banks as they adjust short-term investments to protect principal.
“There was some movement [outside of bank accounts], but not enough to move the needle, and not to the extent we saw money move into banks when the [FDIC’s Transaction Account Guarantee] program was put into place,” said Tom Hunt, director of treasury services at the Association of Financial Professionals (AFP), during a webinar March 13 titled “Short-term Investment Strategies to Manage Global Cash and Financial Risk.” He added those deposits likely shifted mostly to the top five U.S. banks, due to their global positioning.
No post-TAG blues?
Established during the financial crisis, the TAG program provided corporates with a safe haven for their cash by offering an unlimited guarantee on bank deposits, and on December 31, 2012 the guarantee reverted to $250,000 on non-interest bearing accounts. Hunt added that corporate treasury executives have been discussing separately managed accounts as a potential alternative to bank deposits, but have found it “hard to justify” their fee of 15 basis points or more when the accounts typically earn less than 30 bps. Money-market funds haven’t seen much benefit from the elimination of TAG either.
“We’re really seeing that money did not flow into money market funds, which is surprising, and I think a lot of that goes back to the regulatory overhang,” Mr. Hunt said, pointing to the efforts by the Financial Stability Oversight Council and financial regulators to reform the market that may be clouding the outlook for the viability of the funds.
Mr. Hunt noted that a clearer picture of where corporate funds are going will emerge when the FDIC releases the results of its research it is doing on flows, probably in the next month or two.
In a poll of the 180 participants who listened in on the webinar about, most indicated suggest bank products remain the favorite place to stash short-term cash, but money-market funds weren’t far behind. Forty-eight percent pointed to bank accounts while 36 percent said money market funds, 9 percent named government securities, 3 percent US securities, and 3 percent “other.”
That “other” might be some of the products banks and others are coming up with to fill the investment and yield void. One is a Federally Insured Cash Account, or FICA, from StoneCastle Cash Management. FICA is a cash management program that offers weekly liquidity and a competitive yield. And it can also do so with safety: it splits up the cash into $250,000 or less increments and deposits it at hundreds of community banks around the country – which means the cash gets the federal insurance (see related story here).
Not much change.
Webinar participants were also polled on the state of their investment strategies, with 36 percent saying they were in the process of making adjustments to their portfolios, 30 percent said they were considering adjustments, and 33 percent saying they were maintaining current positions. Relative to a few years ago, 77 percent of participants said assessing counterparty risk was more important now, 22 percent reported no change, and 1 percent said it was less important.
The concern about counterparty risk fits into corporates larger worry about protecting principal, according to Tracy Ferguson Knight, a senior solutions consultant at treasury management systems provider Reval, who participated in the webinar. She noted that Reval’s feedback from treasury executives indicated that capital preservation was the primary investment goal, even if rates should rise, followed by maintaining required liquidity to continue operations, and income generation at a distant third.
“[Investment returns] will probably always be in third place, even when corporates can earn significantly higher yields,” Ms. Ferguson Knight said. “Capital preservation instead remains the number one goal.”