As seen in recent headlines, several well-known banks have found themselves being questioned about their financial health and ability to meet the liquidity requirements of their clients. Almost every individual American with an account has become aware that their deposits at FDIC-insured banks are protected up to $250,000.1 But what about larger businesses and corporations that typically maintain more than that level of cash in their business banking accounts?
Larger companies need adequate liquidity for day-to-day expenses (e.g., inventory purchases, payroll) concurrent with managing incoming cash, which also tends to be received in lumpy amounts from various customers. For these businesses, it is impractical to maintain and monitor accounts at multiple banks to ensure that no more than $250,000 is placed at each one. Nor is it realistic for business owners to continuously assess the existential risks to the financial institutions they utilize! While a bank run can certainly occur at unforeseen times, the U.S. banking system remains highly resilient. Having said that, many private businesses have viewed recent events as an opportunity to assess how to manage their corporate cash in a safe and efficient manner. While there is no prescriptive solution that works best for every private company, there are several options.
The first (and sometimes reflexive) option is to move all cash into the safest tier of “too big to fail” banks – the Financial Stability Board’s (FSB) 2022 list of global systemically important banks (G-SIBs) includes JP Morgan Chase, Bank of America, and Citigroup. However, even this option is not without risk; Credit Suisse was a designated G-SIB. One takeaway is that utilizing one large global bank may not be an optimal solution. It is likely not ideal for a private business that values a local presence or a higher level of personalized service.
The second option is to diversify banking relationships. For instance, a company might consider using a local/regional bank to handle the company’s day-to-day operational needs, while keeping excess cash at a money center bank. Many banks automate sweeping of deposits (i.e., moving money at the end of the day) into multiple partner institutions, thus ensuring these deposits stay below the protected levels across several FDIC-insured banks.
A third option could be to look beyond bank deposits into alternatives such as money market funds. Money market funds are diversified portfolios of highly liquid, short-term assets such as U.S. Treasuries. They seek to provide a high level of income consistent with the preservation of capital and the maintenance of liquidity.
As interest rates hovered close to zero over the past decade, most private businesses did not look beyond bank deposits for their cash management given that there was no economic incentive to do so. With interest rates climbing, the considerations have evolved. When thinking about cash allocation, business owners need to balance their requirements for principal protection, liquidity, and yield. Ultimately, the extent of diversification and allocation of cash across various banks and types of accounts should be driven by the business’s specific needs. There is no one-size-fits-all approach to cash management.
Unlike most other banks, Private Banking at Brown Brothers Harriman does not rely on retail deposits and operating corporate accounts to fund our business model. Our deposit base is far more stable than the traditional demand deposit model of retail banks. Over the past few weeks, many of our private business owner and corporate clients have initiated conversations with us regarding treasury management strategies and a variety of other customizable solutions. We would welcome the opportunity to talk to you about your options and what sets us apart.
You could lose money by investing in a money market fund. Although money market funds seek to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.
1 The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the U.S. government that protects bank depositors against the loss of their insured deposits. For further information, please see https://www.fdic.gov/resources/deposit-insurance/.
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