It appears as though all the post-2008 crisis financial regulation is paying off when it comes to perceptions of safety in the banking system. That’s because companies overwhelmingly are keeping their cash in them, according to the AFP’s 2015 Liquidity Survey. This comes even after the government ended the Transaction Account Guarantee, which gave companies unlimited FDIC insurance.
“Currently, 56 percent of all corporate cash holdings are still maintained at banks—the largest share reported in the 10-year history of the Liquidity Survey,” according to the AFP. “More than ever before, an organization’s short-term investment approach is driven by bank relationships.”
And they must be good relationships, because it gets more and more expensive for banks to hold that cash. “Bank deposits could be the new loss leader,” says Thomas Hunt, Director of Treasury Services at the AFP.
And bank relationships are what is driving short-term cash management these days. “When finance professionals consider where to place their organizations’ cash and short-term investments they consider a number of factors,” the AFP wrote. “The most important factor is an organization’s relationship with its bank(s). This factor is cited by 85 percent of survey respondents and represents a 13-percentage point increase from last year.”
The irony, Mr. Hunt says, is that not long ago, good cash management meant “keeping it out of banks.” However, now it’s all about share of wallet and confidence with counterparty risk at banks, he says.
Companies are still opting for safety over yield, according to the survey. Amid a short-term investment landscape characterized by persistently low returns and a continued low interest rate environment, “safety of principal remains paramount as an investment objective,” the AFP wrote in its survey results, “as has been the case for most of the last decade. This year, the share of finance professionals ranking safety as the number one investment objective dropped three percentage points from last year to 65 percent.
While most of the cash is going into (or staying in) bank deposits, the amount of money in money market funds is slowly decreasing, as companies get ready for new SEC rules to kick in in October of 2016. “MMFs account for only 15 percent of organizations’ short-term investment portfolios, off one percentage point from the 16 percent reported in both 2014 and 2013, below the 19 percent in 2012 and significant lower than the 30 percent in 2011,” according to the AFP.
Among MMFs, government funds are gaining in popularity as they will keep the stable net asset value regime that prime funds will see disappear in October 2016. For prime funds, it also will come down to banking relations, according to the AFP. That’s because cash managers are leveraging those relationships when weighing whether to stay in a fund that is sponsored by one of their relationship banks. For the most part companies haven’t decided to completely abandon MMFs quite yet. According to Mr. Hunt, despite it being about 18 months away, companies are “taking a wait and see attitude.”
“Companies will make their decisions when the options are clearer and they have to act,” Mr. Hunt says, speculating that companies will likely start finalizing plans three months ahead.
But they are not completely sitting idle. Companies in the past year have been tweaking investment policies to make room or allowances for riskier types of investments. They are also exploring other products like ultra-short-term offerings from BlackRock, and Western Asset Management. There are also products that offer FDIC coverage, like StoneCastle’s FICA, which spreads cash around a collection of community banks.
Separately managed accounts are also prominent in those explorations. According to the AFP survey, 22 percent of respondents are planning on adding SMAs to their investments. “Separately managed accounts is most often cited as an alternative organizations would consider in response to the money market reform implemented by the SEC (52 percent of survey respondents),” the AFP said.