The cash balancing act

Welcome to the world of Basel III, where having too much cash on hand can actually be a problem for banks and corporations.

With financial institutions facing new liquidity standards that will change the way some deposits are valued, they must determine the stability of deposits as well as reasonable liquidity sources and levels for each deposit type. This could ultimately affect rates of return on a company's long-term investment cash.

Companies, in turn, will be forced to rethink how they invest surplus cash to obtain acceptable yields while also needing to maintain the liquidity and level of security they require. Managing cash flow efficiently is necessary for succeeding today, and banks and their corporate customers will have to collaborate to keep their cash reserves in line and improve their forecasting procedures to traverse the evolving financial landscape.

Banks and corporations must fluctuate between having enough cash, but not too much

It is essential that companies guarantee that their cash flow management and forecasting moves money through the company efficiently and predictably, according to Peter Diminich, regional head of GSF Fixed Income at ING. "I think the most important aspect that a company treasurer needs to have to manage cash more efficiently is a willingness to expand the investment profile and to have a greater flexibility in investment guidelines."

The market will have to adapt and adjust to a middle ground, new structures and new collateral. The efficiency will come from matching investment needs on the treasurer's side in terms of what their investment needs are, and how they can adapt and diversify with a new basket of securities or types. The "one phone call" to make a deal will not exist anymore. "What once before may have been simple overnight transactions, now become evergreens or extendables," said Diminich.

It might be surprising that banks and companies could be worried about having too much cash. Non-operational cash flows, money not used in the everyday running and operation of a company, can cause stress for some chief financial officers and treasurers. Those funds are riskier because they can be withdrawn quickly. The higher that ratio of volatility balances, the bigger risks a bank has. That ramps up further upon examination of the levels of liquidity corporations are holding.

Companies are starting to hoard cash. According to data published in February 2016 by Treasury Strategies, a Chicago-based consulting firm, U. S. companies function with approximately $2 trillion in cash. *)

"The level of corporate cash has been going up and up as it becomes more difficult for corporations to borrow on short term," said Dubos J. Masson, clinical associate professor of finance at Indiana University. "They are just holding cash. A lot of it is sitting in the bank." He believes that much of that $2 trillion is non-operational. Basel III considers that as hot money because it could be utilized elsewhere.

Some banks are also charging excess balance fees on deposits to increase their capital reserves. "If you are a company, you are worried about where you are putting your money because you are concerned about volatility of the banks,” said Masson. "If you are a bank, you worry about having a high level of corporate deposits that increases what the regulators want you to hold as capital."

Dubos Masson explains that financial executives are using data analytics tools and forecasting modules that are built into their treasury or their enterprise resource plan systems. "I think for the corporate treasuries, there should be an increased reliance on forecasting of the cash flows. They need to go beyond what the balance is going to be today and really ramp out and look forward as much as they can – up to a year. That rolling one-year cash budget is a critical tool for companies in this kind of environment to figure out what their liquidity needs are."

Peter Diminich said that banks and companies need to re-think their short-term and long-term strategies. He further explained that banks have to make sure any business they conduct doesn't have a negative impact from a regulatory standpoint. Companies may find that they have to reassess their operations from top to bottom. "I think when it comes to a client relationship with banks, they are undergoing their own reevaluation on the product line basics and we are seeing a lot of those relationships changing as well."

As more of the Basel rules take effect, banks and companies will have to remain vigilant to expected and unexpected consequences. They are already seeing that Basel III actually may be changing before their eyes. Global regulators are looking at further significant changes to capital requirement during the next few years. Some financial executives have termed the actions Basel IV because they are so drastic. They include the raising of the risk-based capital ratio, revising risk weightings and moving away from model-based assessments as part of a revamp of the capital requirements for operational, market and credit risk.

Education will be the key to devising solutions to all of these adjustments, whether they are known as Basel III or Basel IV.  "I think the way to do this is engaging in open dialogue, whether it’s with your counterparties, whether it’s with your peers or whether it’s in conferences and industry forums. The more we speak on it, the better we become educated on it," said Diminich. "We can flush out the nuances among each other and the obstacles that we face to allow us to find better, more intelligent solutions."

According to Diminich, Basel III regulations have created some positive impact. "They have improved liquidity profiles and provided some level of security within the space overall and forced companies to do more evaluation. It has made companies more realistic about their client relations and caused them to take a holistic approach.”


*) Testimony of Anthony J. Carfang, Partner, Treasury Strategies, Inc. February 24, 2016. U.S. House Subcommittee on Capital Markets and Government-Sponsored Enterprises.

Accessible at: