Banks seek (or should seek) to cut significantly deposits

Cash flooding

During the pandemic, we have noticed a wave of cash flooding bank balance sheets has prompted some of the largest US lenders to take an unusual step of advising their corporate customers to move money our of simple bank deposits. It appears that some of the largest American banks have held conversations with largest clients to convince them to put money excesses into money market funds instead of deposits. Unfortunately, an influx of deposits with relatively weak loan demand depresses bank profits. It also increases the bank balance sheets, which requires more capital and reduce bank’s returns on equity. If banks have a supplementary leverage ratio requirement imposed on the biggest US banks following crisis. After some regulatory reliefs, banks must calculate SLR’s with usual rules and banks prefer to be pickier about the deposits from corporates in an effort to avoid tripping regulatory restraints. A large bank would prefer to place client deposits and liquidities into MMF’s because these instruments are managed through their asset management arms and are not included in the leverage ratio calculations. In the long run, such a bank attitude is maybe not good for the system and somehow unnatural for financial institutions. Pandemic-era deposits were initially expected to come out of the system as the economy is normalizing (in some vaccinated countries like USA, Israel, UK) or will normalize in coming months. However, bankers (in the USA now) are thinking that unprecedented stimulus could leave them with excess deposits for years. We all hope and bankers the first that sooner or later corporates will start to reinvest in equipment’s and M&A to make use of liquidities, after COVID.

Dumping in offering zero percent

It would be good if some of the banks that continue to offer zero percent (for EUR) to their corporate depositors would decide to charge every euro at the real market rate to avoid creating loopholes that the smart one’s use. It is not unacceptable for the corporate to try to pay as little as possible for their excess cash. But for the market, it is better to have an effective price applied by all to all products. Dumping is never good. Excess cash, if it serves the business and the working capital, makes sense and is advisable, if it is not exaggerated and destructive of value. The crisis has increased the effect of prudence and overprotection through the accumulation of cash reserves. But is this really the right approach? This is especially true since there are alternative short-term investment products. Unfortunately, they are not as popular as they should be with corporates and private equity funds, I am afraid.

Favoring Money Market Funds (MMF’s)

Some claim that it would be complicated to manage, not profitable enough etc... There needs to be an incentive and performance will be the best promoter of MMF's. They are healthier because they are diversified and balanced. They are a good treasury practice, and it mitigates the counterparty risk. What does explain this behavior? Misunderstanding? Laziness? Ignorance? Willingness not to complicate daily management? We do not know. The impression of being loyal to one's bank? I do not know what the reasons are. Maybe a few at the same time. Treasury associations and MMF sponsors should develop efforts to educate the market and convince treasurers that MMF’s may be a suitable, financially sound, and less risky solution, which is virtuous for banks. I guess we have a lot of work to convince recalcitrant and rigid treasurers and PE managers that there are cash short term solutions which make more sense than deposits in low/negative interest rates currencies.

Fran?ois Masquelier – Chairman of ATEL – May 2021