Corporate cash holdings are on the rise as companies prioritize liquidity over long-term investment in an uncertain economic environment. Recent data shows more firms are not only holding onto cash, but increasingly keeping it in bank deposits. Some observers point to banks as active participants in this trend, offering more attractive rates to draw in stable corporate funds under evolving regulatory frameworks like Basel III. While that dynamic may benefit large corporations with significant balances, the broader picture is more nuanced, with smaller firms less likely to see the same advantages.
Corporate cash in the form of bank deposits is rising, as firms rebuild liquidity but hesitate to commit to significant investments. The Wall Street Journal’s editor Vipal Monga believes that banks are deliberately attracting these deposits, and offering higher rates as evidence of their interest. He cites anecdotal evidence of CFOs and treasurers attesting to receiving slightly higher rates for corporate deposits, especially if committed for medium terms. He also cites the Association for Financial Professionals (AFP):
“In a May survey of nearly 900 corporate-finance departments, the Association for Financial Professionals found that 40% had increased their cash holdings from a year earlier in the first quarter of this year. What’s more, half of the cash on company balance sheets was held in bank accounts, up from one-quarter in 2008, the survey showed.”
Editor Vipal Monga offers his explanation for the change:
“The new attraction for banks is that corporate checking accounts, which companies use to fund daily operations, are considered relatively stable under the so-called Basel III international banking rules. That means banks will need to hold assets in reserve against just 25% of the money in these accounts, freeing up more funds for higher-yielding investments. By contrast, banks will be required to keep assets in reserve equal to 100% of the deposits from hedge funds because of the greater risk of sudden withdrawals.”
Both the increased liquidity and the increased willingness to keep that liquidity in U.S. bank accounts reported by AFP members are consistent with the current uncertain economic conditions. However, one should take this observation about banks’ motivations with a grain of salt. The need to preserve capital in anticipation of Basel III requirements is a concern of the larger banks, but probably not of the second and third tier. Thus, while Fortune 1000 firms may see the benefits of higher offered bank deposit rates, smaller businesses are unlikely to reap the same rewards regardless of where they bank.
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