Capital Advisors on Bank Deposits

ByCAG Staff - s.h.

Capital Advisors published, “Revisiting Bank Deposits as a Liquidity Solution.” The piece says, “​The search for liquidity management solutions reached a new level of significance when institutional prime money market funds were required to float net asset values (​NAVs) last fall. While treasury organizations may consider bank deposits as a fallback liquidity solution, regulatory changes, interest rate dynamics and other external factors demand a refresher course. In our previous whitepapers, we discussed the transformation of corporate deposits as liquidity vehicles and reduced appetite of large systemically important banks (​SIBs) for overnight deposits. Banks do not appear to have benefitted from the recent money market fund (​MMF) reform through deposit inflows. Instead, asset declines in prime funds were met with almost identical increases in government fund assets. Still, treasury organizations generally maintain deposit relationships, often with multiple banks, for liquidity, savings, escrow, trade, business relationships or other reasons. Institutional deposits tend to be greater than $​250,​000, and not protected by the FDIC deposit insurance. Some are placed with US branches of foreign banks under different sets of banking rules than those of the US financial authorities. In this update, we review recent deposit growth among institutional liquidity accounts, issues surrounding the earnings credit rate (​ECR), and the lagging yield effect of deposits in a rising interest rate environment.” The paper adds, “For as long as the history of modern banking, bank accounts were the primary, and often only, liquidity tool for businesses and other institutional entities. This reliance started to change with the introduction of money market mutual funds in the 1970s. The Federal Reserve’​s Flow of Funds reports … show that 79% of the liquid balances at non-​financial firms in the United States were in checking accounts or cash in 1970, with another 8% in time and savings deposits. Commercial paper investments (​12%) made up the rest.”