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Cash-management conundrum for liquidity-rich treasurers

Low returns, new regulations, shifting business practices and – for the first time – fears over counterparty risk are challenging banks’ traditional cash-management products in an era of high corporate cash piles. Corporate treasurers are now mulling alternative short-term cash management solutions.

As economic uncertainty persists, the animal spirits of corporate adventurism remain subdued. One impact of that caution is expanding piles of cash on corporate balance sheets, but new regulations mean it’s becoming tougher for treasurers to place their reserves. Some 37% of organizations had larger cash balances at the end of the fourth quarter of 2012 than at the end of the third quarter, according to the Association for Financial Professionals. Meanwhile, a net 20% of treasurers said they had increased cash and short-term investment holdings over the past year.

“Companies have more cash than ever because the uncertain economic situation makes it difficult to make investment plans,” said Martin O’Donovan, deputy policy and technical director at the Association of Corporate Treasurers (ACT). “Also, banks are less willing to make a facility available at a moment’s notice, which means it makes more sense to hold on to cash.”

Changes in the way companies are doing business have fuelled appetites for cash, O’Donovan said. For example, the increased adoption of just-in-time production strategies means treasurers are more likely to require short-term cash at hand, perhaps to cater to a sudden shift in demand requiring new orders.

The US Federal Reserve reports US corporate cash as of September 30, 2012, was $1.73 trillion, a 2.5% increase from the prior quarter. The European Central Bank reports EU corporate cash as of June 30, 2012, was €1.93 trillion, in line with the previous quarter, while UK corporate cash as of September 30, 2012, was £0.69 trillion, a 4.5% decrease from the prior quarter.

However, as the coffers brim, finance executives are set to confront a raft of new Basel and US regulations, which will have a direct impact on short-term cash management, in terms of risk profile, liquidity and returns.

In the US, the Dodd-Frank Wall Street Reform and Consumer Protection Act mandates unlimited Federal Deposit Insurance Corporation protection for balances in non-interest bearing transaction accounts. However, that protection might expire at the end of this year, adding an element of risk to what was previously a risk-free strategy and perhaps leading to demand for more bank counterparties.

Meanwhile, under the Basel III accord, banks will be required to maintain strong liquidity buffers of high-quality assets against a portion of any deposit that does not have a term of greater than 30 days. In response, banks prefer money for more than 30 days and many have moved in recent months to provide deposit facilities, which have rolling 30-day maturities, enabling them to meet their regulatory requirements.

“Companies, and particularly smaller ones, like to be able to access cash quickly, so longer-dated deposits may not be ideal,” said David Kelin, UK partner at Zanders UK LLP. “Another issue is that there may be counterparty risk with banks, and that is where cash management becomes an important issue, because corporates need to know what exposure they have with their banks – a concern you never would have thought about a few years ago.” In response, many companies are looking to reduce the amount of time they put money on account at the bank, particularly in the current low interest rate environment, in which returns are minimal.

“Treasury managers do need to think about what alternatives are out there, like commercial paper and some new non-bank instruments,” Kelin said.

One common alternative is money market funds, but here too there is potential for new regulations, including capital requirements, holdback provisions and accounting requirements.

“With some of the riskier funds we are likely to move to a mark-to-market accounting model, which is something treasurers are particularly keen on,” said the ACT’s O’Donovan. “You are losing some of the smoothing provisions you were able to take advantage of previously.”

As treasuries mull their options, one alternative being talked about is so-called non-traditional repos, in which cash is deposited with banks in return for collateral, which the bank must deposit for the benefit of the company. The solution is somewhat complex to set up and therefore is likely to be most attractive for those with sums in the tens of millions to deposit, analysts say. Still, in anticipation of rising demand, there are already several third-party vendors offering proposed repo solutions via their platforms.

“Repos have traditionally been executed between financial institutions but now companies are becoming more cautious and saying ‘we would like some security as well’, and in that context repos might make sense,” O’Donovan said. 

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