Rethinking Bank Deposit Exposures

It may be time for a refresher course on the pros and cons of bank deposits as the primary repository of corporate cash. In the wake of last fall’s transition to floating net asset values (NAVs) at institutional prime money market funds, treasurers were already going through a once-in-a-generation rethink of liquidity and risk. Now, after nearly a decade living in a zero-rate environment, rising interest rates have many corporate cash managers thinking about income as well.

Bank checking and savings deposit accounts are an easy and familiar alternative to prime funds. But ever since the FDIC’s post-financial-crisis guarantees on unlimited deposits expired in December 2012, corporate treasurers have had to keep an eye on potential exposures of the banks holding their cash. Additionally, many deposit rates haven’t kept pace with the Fed’s hikes.

Our research report this month, Revisiting Bank Deposits as a Liquidity Solution, helps corporate treasurers understand the risks and rewards in this new environment. Among other things, it points out opportunity costs incurred with bank deposits, where yield improvements have fallen behind the pace of rate hikes by the Fed. It also examines some of the credit risks inherent in holding a high percentage of cash in uninsured accounts. And it suggests risk diversification strategies including direct investment of corporate cash in commercial paper and other credit instruments in separately managed accounts.

The world of non-zero interest rates holds the promise of new opportunities along with new risks. Embracing easy and familiar solutions is a good place to start, but a new mindset may help strike the right balance of liquidity, risk and return in today’s rapidly evolving cash management landscape.

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Best Regards,

Ben Campbell
CEO