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The Transformation of Corporate Deposits in a New Regulatory Environment

2 min read

Abstract

Bank deposits have always represented the main cash management vehicle for institutions. Growth in deposits and money market fund balances crisscrossed each other over recent decades. Recent financial regulations, notably the liquidity coverage ratio, net stable funding ratio and G-SIB capital surcharges, caused deposit dynamics to change, reducing banks’ appetite for non-operating deposits. We offer seven practical tips to help treasury managers cope with the new deposit reality.
Seven Tips to Cope:

  1. Deepen existing relationships
  2. Diversify
  3. Size still matters
  4. Integrated counterparty risk assessment
  5. Liquidity is the name of the game
  6. Alternative liquidity vehicles
  7. Beware of higher interest rates

Introduction

For centuries, businesses and individuals used banks for the majority of their financial transactions. The creation of the Federal Reserve System in 1913 and the Federal Deposit Insurance Corporation (FDIC) in 1933 gave the United States one of the strongest, safest and most trustworthy banking systems in the world. It is no surprise that treasury organizations rely heavily on deposits as their primary liquidity management vehicle.
The two decades before the U.S. financial market crisis of 2008 can be characterized as a period of rapid deregulation and disintermediation along with waves of bank mergers. The subsequent dramatic re-regulation to reduce systemic risk presents new challenges to corporate cash investors. On the one hand, transactional deposits become less profitable for large banks, which motivates the institutions to move them off balance sheet or impose stiff fees. On the other hand, institutional prime money market funds, a popular alternative cash vehicle, must adopt floating net asset values (NAVs) and optional redemption fees and gates by October 2016, limiting their utility as liquidity tools.
With these concerns in mind, we seek to help corporate treasury professionals to refocus attention on the mundane world of transactional deposit relationships, understand the current market dynamics, and carve out a balanced approached to cash investment solutions.
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Lance Pan joined Capital Advisors Group in 2003. As Director of Investment Research and Strategy, Lance assesses the risk and relative value of asset classes and credits, creates advanced credit approval and surveillance procedures, issues credit opinions, and provides investment strategy recommendations. Lance oversees Capital Advisors Group’s Credit Committee.

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