Debunking the cash hoarding myth

January 2013

Despite non-stop media reports of corporates hoarding vast stockpiles of cash, the amount held by US corporates only increased slightly in 3Q12, while both European and UK corporates are decreasing the amount of cash they hold.

Over the past few years, many headline inches have being devoted to the extraordinary level of cash held by corporates, while the ensuing articles berated the corporates for refusing to nurture the green shoots of economic recovery by investing their cash for future growth.  But there is no evidence that corporate cash levels have ballooned in recent years, according to Treasury Strategies.

Analysing figures released by the US Federal Reserve, Office of National Statistics and European Central Bank, Treasury Strategies report that:

• Although US corporate cash as of 30th September 2012 reached an unprecedented level of $1.73 trillion, it only increased by 2.5% on the previous quarter.  The pace of increase actually declined over the past 18-24 months relative to earlier in the past decade.
• UK corporate cash as of 30th September 2012 was £0.69 trillion, a 4.5% decrease from the prior quarter.
• EU corporate cash as of 30th June 2012 was €1.93 trillion, a 0.40% decrease from the prior quarter and at the same level as in 2010.

Interestingly, since 2000 UK corporate cash grew the fastest of all the regions, effectively tripling over the 12-year period.  However, it has now seen a decrease in three consecutive quarters, which may be a reversion to the mean.

“Taken together, the US and Eurozone data move pretty consistently with each other, which may be a good indicator of the actual global levels of cash.  The UK data, on the other hand, shows more volatility,” says Tony Carfang, Partner, Treasury Strategies, which he thinks may be a result of the more global nature of the London market.

When looking at the levels of corporate cash as a percentage of GDP per region, in 2000 US corporate cash was 10% of GDP, whereas in 2012 it had only increased by 1%.  “It has held flat at 11% for a few years now, which counters the notion in the press that US corporates are hoarding cash.  That is clearly not the case,” says Carfang.

Both Eurozone and UK corporate cash levels have experienced greater fluctuations.  In the Eurozone, corporate cash levels increased from 14% in 2000 to 21% in 2012, with the biggest jump in percentage taking place in 2009/10.   In the UK levels started at 26% in 2000, peaked a year ago at 52% a year ago and have since continued to decline.

The end of TAG

 

The 31^st December 2012 expiration of the Transaction Account Guarantee (TAG) programme, which was unlimited Federal Deposit Insurance Corporation (FDIC) insurance on all corporate transaction deposits, is an important change in the US regulatory environment worth mentioning, according to Treasury Strategies.  In place since early 2009, it is estimated that between $1.2 trillion to $1.4 trillion moved into US commercial bank deposits in order to take advantage of this special insurance guarantee.

“This is the first major unwinding of a post-crisis remedy,” says Carfang.  “And it may provide some insight as to how things may unfold as these cures begin to be dismantled.”  Many predicted that when deposit insurance was scaled back from unlimited to $250,000, billions of dollars would flow out of banks and into other instruments, particularly money market funds (MMFs).

However, leading up to the expiration date, in 4Q12 the deposits at US banks actually increased by 4%.  “This may indicate that market players believe that the banks are healthy and they don’t need deposit insurance, which is a good sign,” says Carfang.  “Or it may indicate that corporate treasurers believe that this money is implicitly guaranteed by the government and it doesn’t really matter.”

Treasury Strategies saw an inflow of $140 billion into MMFs, but nowhere near the $1.4 trillion that the MMF industry lost when the bank guarantee went into place in 2009.   MMFs assets went up by 5.5%, treasury funds experienced a 7% increase and prime funds saw only a 3% increase.  “The message is still one of safety, but also a willingness to diversify out of the banking system,” says Carfang.

Treasury issues for 2013

 

Treasury Strategies surveyed its LinkedIn groups to identify the most serious issues for corporates in 2013.  Based on 316 responses, the top concerns are:

1. Economic outlook /interest rate levels (37%).
2. Regulation (28%).
3. Currency/counterparty risk (17%).
4. Availability of capital (16%).
5. Other (2%).

“Everyone feels it is hard to get a handle on the economic outlook and it is not helped by the political environment – ie the fiscal cliff and Eurozone crisis,” says Monie Lindsey, Managing Director, Treasury Strategies.  “There is awareness that regulation will have an impact but for treasurers the impact is unknown.”

Interestingly, currency/counterparty risk came third.  Based on the conversations with clients, Lindsey believes that most corporates have addressed counterparty risk by putting in place policies, processes and technology to help manage and monitor it.  “While it is a critical piece and an issue for everyone, most treasurers feel that they have it under control,” she says.  “What they don’t feel like they have under control is the economy and new regulation.”

First published on www.treasurytoday.com