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Still Ignoring the Risks Inherent in Bank Deposits?

Smart corporate treasurers are rethinking cash investment policies and counterparty risk frameworks held over from the “too-big-to-fail” era.

To paraphrase General Douglas MacArthur: Old investment policies never die; they just fade away.

It’s been nearly a decade since post-financial-crisis banking reforms attempted to end the era of “too big to fail.” And it’s been nearly five years since Dodd-Frank guarantees on unlimited deposit insurance expired. But according to the 2017 Liquidity Risk Survey of 130 treasury professionals, conducted by Capital Advisors Group and Strategic Treasurer, most companies’ investment policies ignore emerging exposures inherent in maintaining sizable bank deposit balances.

Figure 2: What revisions have you made to your corporate investment policy in the past two years?At the same time, however, there is evidence that some treasury teams are starting to pay closer attention to updating the fine print in their investment policies on a regular basis. More than a fifth of survey respondents have added restrictions on the purchase of securities that their organizations view as too risky (see Figure 2). For example, many treasury teams are currently imposing limits on investments in European financial institutions that have been buffeted by headwinds caused by Brexit uncertainties, ongoing sovereign debt problems, and other challenges.

When an investment policy is updated every year, it is possible to impose—or remove—restrictions on specific investments and/or entire asset classes that have been impacted by current events. Such annual reviews of potentially problematic asset classes became more common after the financial crisis, when many investment policies were amended to disallow auction rate securities and other structured products that created so many unexpected problems.

Figure 3: In the past year, what U.S. investment channels did you use for short-term funds?Still, institutional investors don’t seem to be losing sleep worrying about the safety of the cash they keep in deposit accounts. Perhaps that’s because since the end of the “too big to fail” regulatory era, there have been no major bank failures in the United States. Whatever the reason, corporate cash managers have been slow to abandon the investment channel which, for decades, has been regarded as one of the safest havens for corporate cash. In the 2017 Liquidity Risk Survey, 68 percent of respondents said they continue to depend on bank deposits to park at least some of their short-term cash investments (see Figure 3).

A bank failure would be troublesome, to say the least. No U.S.-based bank has yet gone through the orderly liquidation process set up by U.S. regulators to lessen the disruption of bank failures. In the European Union, where regulators set up a similar process known as the “single resolution mechanism,” corporate investors had a brush with default risk last year, when the near-collapse of troubled Spanish bank Banco Popular set the resolution mechanism in motion. The incident was a wakeup call for both banks and corporations that hold large reserves of uninsured cash in deposit accounts. It was also another step in the progression away from a “too-big-to-fail” mentality toward more awareness of the real risks depositors face with the possibility of future bank failures.

More Robust Counterparty Risk Frameworks

Viewing banking partners’ exposures through the lens of counterparty credit risk management continues a trend among treasury professionals toward more of a focus on counterparty risk. A strong majority (78 percent) of respondents to the 2017 Liquidity Risk Survey indicated they are collecting and reviewing counterparty exposures in aggregate, and tracking many key indicators daily.

Credit Facilities Move Front and Center

Many treasury professionals today are working to bring their credit facilities into sharper focus. Even though most respondents to the 2017 Liquidity Risk Survey said they have not changed their investment policies in the past year, 59 percent have renegotiated their credit facilities—and 38 percent have done so within the past six months.

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