Looking Beyond Bank Deposits and Money Market Funds

Abstract

Greater vigilance is required of today’s treasury investment professionals. Neither bank deposits nor money market funds may be appropriate in the post-crisis, post-regulatory environment. As yields start to rise, cash investment strategy decisions that may have been delayed will require serious consideration. Direct purchases in separately managed accounts may become the primary alternative cash strategy. A framework of stratifying one’s cash balances by liquidity objective is discussed.

Introduction

Remember Broadhollow Funding and Ottimo Funding? Eight years ago this month, credit woes at the two subprime-tainted commercial paper issuers marked the beginning of the turmoil that fundamentally changed the financial world. As the economy improves and interest rates move higher, treasury investment professionals may be expecting the good old days of decent yields in safe investments, but a new and different world awaits us.
Today’s cash investment landscape is shaped by higher risk awareness, better understanding of liquidity costs and stricter systemic regulation that requires new thinking in corporate cash investment strategies. Interest rate changes may be cyclical, but bank and money market fund regulations are likely to leave a long lasting structural impact. Taking the longer view, the sensible treasury investment manager may need to look beyond current practices for other cash investment alternatives.
In this commentary, we reintroduce some of our thoughts on cash investment strategies with the understanding that bank deposits and money market funds alone may no longer be sufficient cash management tools after new regulations are fully implemented.
The Search for Alternatives Delayed but Not Forgotten
The vulnerability of a corporate cash management model based on money market funds and uninsured deposits was evident during the turmoil following the Lehman Brothers bankruptcy. However, the government’s subsequent guarantees on money market funds, bank debt and deposits delayed broader recognition of the faults in this model by several years. When the unlimited FDIC guarantees on transactional accounts expired in 2012, treasury investors still lacked the incentive to search for alternatives, as money market reform remained uncertain. The near-zero yield environment also made risk-reward tradeoffs of alternative strategies less appealing.
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