The recent failure of three regional U.S. banks is likely influencing companies to lower their allocation of cash and short-term investments to bank deposits.
Less than half (47%) of such reserves were parked in banks as of March 2023, according to the Association for Finance Professionals’ latest liquidity survey. That was 8 percentage points lower than a year earlier and the lowest level in four years.
AFP stated unequivocally in its survey report that the decline in bank deposits “is being driven by the bank failures that occurred in March,” a reference to Silicon Valley Bank (SVB) and Signature Bank.
It’s notable, though, that the survey, which included 222 treasurers and other finance professionals, also was conducted in March. If they’d already begun reducing their bank deposits by then, and the bank failures were the key reason, it would be reasonable to assume that the level of such allocations has continued to decline since then, especially following the May failure of First Republic Bank.
Some regional banks remain concerned about the possibility of failing, according to AFP.
Perhaps also underscoring concerns about the safety of regional banks, participants in this year’s AFP survey were less likely to identify “overall relationship with banks” as a primary determinant when choosing banks. The proportion fell to 83%, a 10-point stumble from 2022.
Banking Safe Harbors
Much of the money previously allocated to bank deposits is being shifted to safe investments like money-market funds, Treasury bonds, and agency securities, all of which are finally generating substantial returns after years of barely-there interest rates.
Far more treasury professionals said they planned to continue increasing their allocations to money market funds (38%) over the next year, compared with those who expected to decrease them (8%). For T-bills, 30% said they planned to increase their investment level, while 10% were looking at a decrease.
The shift in the investment mix “signals a flight to quality from organizations’ bank exposures,” AFP said. “But in addition, as money funds’ durations shrink, there is additional yield to capture, as rates are expected to increase and the shorter maturities will capture the rise in rates more quickly.”
Almost two-thirds (63%) of participants said safety is the most important objective of their cash investment policy. It does not appear, though, that the bank failures significantly influenced that result, which was identical in AFP’s 2022 survey.
“It is not surprising that organizations are continuing to choose safety over liquidity given the current economic environment, inflationary pressures, numerous interest rate increases, a potential banking crisis, and geopolitical concerns,” AFP said.
Cash-Policy Objectives
A third of participants cited liquidity as their most important cash-policy objective, while only 4% cited yield. However, yield was the number one driver in selecting money market funds. “Bank deposits did not move in step with Fed Funds rate increases over the last year, as money funds did,” the report noted.
Among 14 drivers of money-market selection, environmental, social, and governance (ESG) factors ranked dead last. That doesn’t mean companies aren’t increasingly mindful of ESG, though. Only 5% of this year’s survey participants said they do not have any of their operating cash in ESG investments — a huge change since last year when 48% of organizations said so.
David McCann is a New York-based freelance writer and a former senior editor at CFO magazine and CFO.com.