Cash Management

3 Ways to Mitigate Corporate Cash Liquidity Risk

The corporate cash playbook has changed for CFOs in the post-Silicon Valley Bank world.
Jerry KleinMay 22, 2023
3 Ways to Mitigate Corporate Cash Liquidity Risk
Photo: Getty Images

CFOs learned an important lesson after this year’s banking woes sent Silicon Valley Bank and First Republic reeling. Leaders must know where their company’s cash is being held and how it is being managed. Although this may sound simple many companies have overlooked this. Now, as we still grapple with the ripple effects of this year’s banking crisis, companies are revising their investment policies and establishing new procedures to enhance safety, liquidity, and access to their funds.

Here are three ways for CFOs to mitigate corporate cash liquidity risk in the post-SVB world:

1. Understand Principal Risk vs. Access Risk

Many companies had cash deposited in a Silicon Valley Bank business checking account which means they would have been out of luck if the government didn’t step in. This is known as principal risk, where any amount deposited into a checking account above the FDIC’s $250,000 limit is at risk should the bank go under.

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Jerry Klein

Many of these same companies also used Silicon Valley Bank’s money managers to invest their company’s money, primarily in a low-risk bond portfolio. While the money managed by Silicon Valley Bank was always safe because the money was held by SVB’s custodian, U.S. Bank, and not on Silicon Valley’s balance sheet, the collapse of Silicon Valley Bank posed severe access risk for companies that used SVB’s money managers, because once the bank collapsed, SVB was not immediately processing wire transfers, so any money that SVB was managing wasn’t immediately accessible, even though the funds were essentially being held in an account with U.S. Bank.

Most companies require immediate access to cash at all times. It sounds like a basic principle of finance, but it’s been overlooked for years amid the perceived lack of risk in banks.

2. Diversify Your Relationships

Regional banks have clearly taken a reputational hit this year, as many view the systemically important banks as safer.

There isn’t anything inherently wrong with having money at a regional bank. It’s just important for CFOs to be aware of the risks and take steps to minimize the risks.

We recommend that companies maintain at least three months’ worth of monthly expenses in a government-backed money market fund. 

There is a simple way to avoid the double-whammy of principal risk and access risk. Many banks strive to provide a wide array of services to their clients. Ideally, the bank wants to offer basic banking services, like concentration checking accounts. In addition to having cash in these accounts, many companies may secure loan facilities or even may hire the bank’s in-house money managers to manage any excess corporate cash. 

While having all of these services under one roof is convenient, it’s also risky. Companies that hire a money manager to look after their company’s cash should use a manager that is affiliated with a different financial institution than the one that holds their concentration accounts. For companies that insist on having both under one roof, at the very least, hire a second money manager at a different financial institution. That way if the first bank fails, you have a backup option to access cash immediately. 

3. Have an Emergency Fund

We recommend that companies maintain at least three months’ worth of monthly expenses in a government-backed money market fund. This emergency fund can be managed by a money manager at a financial institution that is unaffiliated with the one that holds the company’s main concentration account. Access to cash in a pinch is critical.

Cash is the lifeblood of every business and it’s crucial to keep it safe and sound.  

This money would generally be invested in U.S. government bonds and money market funds. We view government bonds as more optimal than merely having this emergency fund in a checking account at a large systemically important bank.

Government money market funds often have comparable or higher yields than bank deposits without the risk of a bank. They are typically liquid for redemptions until late in the afternoon which makes them an attractive place for corporations to park overnight liquidity.  

This emergency fund can be used to cover the basic expenses of the business, primarily payroll. When SVB failed, a number of our clients asked us to wire funds from their investment account (i.e. their emergency fund) to payroll providers and various vendors. 

Cash is the lifeblood of every business and it’s crucial to keep it safe and sound. 

Jerry Klein is managing director and head of corporate cash management at Treasury Partners, a New York-based investment firm.