Corporate Treasurers are “Ignoring Bank Exposures” Despite Ongoing Regulatory Changes to Prime Money Funds and Bank Deposits
New Liquidity/Risk Survey Identifies Opportunity Costs Associated with Bank Deposit Balances
BOSTON, June 30, 2016 – Many corporate treasurers are “ignoring bank exposures” in the wake of reforms that are changing the risk and liquidity profiles of prime money funds and bank deposits, a new survey has found.
The 2016 Liquidity Risk Survey of 130 treasury professionals by Strategic Treasurer and Capital Advisors Group found that nearly half (45%) “don’t know yet” how their cash investment strategies may change when institutional prime money market funds abandon fixed $1-per-share pricing and adopt SEC-mandated floating net asset values (NAVs), liquidity gates and redemption fees this October. And more than a third (34%) indicated they will move cash to Treasury and agency funds—in spite of low potential returns.
The survey also found that 77% are continuing to hold cash in bank deposits in spite of changes in banks’ risk return profiles. Basel III reforms enacting liquidity coverage ratio (LCR) requirements are prompting many banks to limit availability and provide lower returns on deposits relative to other cash investments. An overview of the survey results is available at www.strategictreasurer.com.
A New Cash Management Landscape
“Many treasury professionals are uncertain about how to adjust to a new cash management landscape created by post-crisis banking and money market reforms,” said Capital Advisors Group CEO Ben Campbell. “But by retreating to low-yield, low duration government funds and bank deposits rather than seeking out other cash investments providing higher yields, many may stand to incur substantial opportunity costs.”
Craig Jeffery, Managing Partner of Strategic Treasurer, noted that high demand for government notes and Treasury money funds in an environment of continued supply contraction will require treasurers to recalibrate their corporate investment policies. He said treasury professionals should find a way forward with updated policies designed to address new or alternative cash investment opportunities in 2017 and beyond.
Investment Policy Latitude
“Survey results indicate that investment policy latitude will continue to expand, which will enable treasurers to alter their mix of cash investments to seek out the appropriate balance of safety of principal, liquidity and yield,” Jeffery said, adding that in the past year progress has been made on policies governing counterparty risk exposures and investments. “And as banks reduced loan covenants and increased asset backed lending requirements, firms have diversified maturity dates for their credit facilities.”
The survey addresses how treasury professionals are coping with multiple developments in the new environment, including:
- Debt: Continued reduction in loan covenants, ongoing increases in the use of asset-backed lending requirements, and diversified maturity dates or credit facilities.
- Investment: Outflow of cash from prime money market funds, continued uncertainty about the impact of money market fund reform, and policies with expanded latitude for cash investments.
- Counterparty Exposures: Progress on risk frameworks and policies that govern counterparty risk exposures and investments, with more firms setting limits on uninsured bank deposits.
Strategic Treasurer and Capital Advisors Group have been fielding the Liquidity Risk Survey since 2011, providing year-over-year comparisons of answers to dozens of questions on corporate risk, liquidity and cash investment strategies.
About Strategic Treasurer
Strategic Treasurer was formed by Craig A. Jeffery in 2004 to provide corporate, educational, and government entities direct access to comprehensive and current assistance with their treasury and financial process needs. His 25-plus years of financial and treasury experience as a practitioner and as a consultant have uniquely qualified him to lead the Strategic Treasurer team in helping organizations craft realistic goals and achieve significant benefits quickly. For more information, visit www.strategictreasurer.com.
About Capital Advisors Group
Capital Advisors Group, Inc. is an independent investment advisor specializing in institutional cash investments, risk management, and debt financing. Drawing upon a quarter of a century of experience through varied interest rate cycles, the firm has built its reputation upon deep, research-driven investment strategies and solutions for its clientele. For more information, visit capitaladvidev.wpenginepowered.com.
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Capital Advisors Group, Inc.
(617) 630-8100
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