Liquidity Funds: Eyeing up Europe's cash balances

Merrill Lynch Mercury Asset Management reports that UK FTSE 350 companies, excluding banks, are sitting on £65 billion ($108 billion) of cash, most of it placed on deposit in the interbank market. It further estimates that European corporations, insurance companies and pension funds are together rolling over some $561 billion of liquidity, mainly through interbank deposits. Corporates account for some 70% of that liquidity. These companies haggle with their banks to cut liability costs by a few basis points. They should ask themselves whether they are also earning a competitive return on their cash assets.

Just $10 billion of that European liquidity - less than 2% of the total - sits in institutional liquidity funds. While this remains a small sector of the European short-term finance markets, it is a well-established alternative to bank deposits in the US. There, institutional liquidity stands at $2.7 trillion, of which $1.3 trillion...