Washington – July 10, 2012 – As the FDIC and Federal Reserve evaluate the first group of resolution plans from the largest banks in the United States, economic and regulatory uncertainty is driving companies to seek safety for their short-term investments. This is in turn leading to even greater concentration of corporate cash in bank deposits.
According to data released today by the Association for Financial Professionals (AFP), bank deposits have become the primary short-term investment vehicle for corporations, accounting for 51 percent of short-term investment balances. Findings from the 2012 AFP Liquidity Survey show the highest allocation to bank deposits in the survey’s seven-year lifespan, nine percentage points above last year’s findings. As recently as 2006, the average allocation was 23 percent.
Furthermore, the high concentration in bank deposits may escalate if reforms to money market funds (MMFs) hinted at by the U.S. Securities and Exchange Commission are implemented. The reforms that have been discussed include a mandated floating net asset value, redemption holdback provisions, or a requirement for funds to create capital reserves. AFP has consistently opposed these reforms. The AFP survey indicates that if any of these reforms were to become effective, a minimum of 66 percent of organizations would stop investing in money funds or trim holdings. Of the $2.5 trillion held in money market funds, approximately $1.6 trillion represents institutional holdings.
“Companies have been shifting short-term holdings to bank deposits over the last several years due to an increased emphasis on safety and liquidity,” said Jim Kaitz, AFP’s president and CEO. “This trend, coupled with unlimited FDIC insurance of certain bank accounts and ongoing uncertainty about the future of money market funds, may have the unintended effect of exacerbating concerns on Capitol Hill about the systemic risk posed by the largest financial institutions.”
TIMING OF CASH RE-ALLOCATION
Most large companies maintain their primary relationships and deposits with larger banking organizations, due to the complexity of their cash management, risk management and financing needs. Under FDIC rules stemming from the Dodd-Frank Act, corporate deposits in non-interest bearing transaction accounts are covered by unlimited insurance through December 31, 2012. If companies divest money fund holdings as indicated by the survey, it is likely that the larger banks will see the greatest influx of deposits.
More than three-quarters of organizations indicate that safety is the most important short-term investment objective for their organizations, compared to the 21 percent that indicate their organizations’ most important cash investment policy objective is liquidity. Only two percent of companies select investments with the primary objective of yield.
ABOUT THE SURVEY
The Liquidity Survey is AFP's annual study that allows financial professionals to gauge current trends in organizations’ cash and short-term investment holdings, investment policies and strategies. AFP conducted the survey in May 2012, generating 391 responses. The survey respondents were senior finance and treasury executives from a broad range of companies—typically U.S.-based multinationals with a median of $2 billion in revenue. The typical AFP member works at an organization with complex treasury operational needs that can be met only by large regional banks and global banks.
ABOUT AFP® (afponline.org)
The Association for Financial Professionals (AFP) is a professional society headquartered outside Washington, DC, that provides members with news, economic research and data on the evolving world of treasury and finance, certification programs, networking events, financial analytical tools, training, and public policy representation to legislators and regulators. AFP's global reach extends to over 150,000 treasury and financial professionals worldwide, including AFP of Canada; London-based gtnews, an on-line resource for the treasury and finance community; and bobsguide, a financial IT solutions network.