Corporate Cash Tops $4.1 Trillion. $1.5 Trillion Post Pandemic Liquidity Buffer

December 2021.   Corporations continue to maintain the huge cash reserves accumulated during the Covid pandemic according to the Federal Reserve’s Quarterly Flow of Funds report just released.  At $4.1 T, U.S. corporate cash levels hover near their all-time high.  They are within only $20B from the 2Q20 pandemic peak level but still $1.5T above the pre-pandemic trendline. 

According to Anthony J. Carfang, Managing Director at The Carfang Group, “Corporate cash grew by another $180 billion during the third quarter.  Companies still harbor concerns about the economy, interest rates and inflation.  Corporate treasurers are very worried about the hidden risks that unprecedented monetary expansion could portend.” To learn more about these findings, join our Quarterly Liquidity Briefing webinar on January 20 click HERE.

The Fed’s balance sheet assets more than doubled from $4.1T to $8.6T since Jan 2020, a spectacular 110% jump.  It continues to expand by $120B per month although the Fed recently announced a tapering of the rate of expansion.  

During the first quarter, the Fed reinstituted its reverse repo program.  Within nine months, RRP has grown from virtually zero to $1.5T.  Concern among treasurers and bankers is that such massive Fed positions mute important market signals and obscure potential risks.  RRP now seems to be rising as the same pace as the Fed’s bond buying program, sending sharply inconsistent signals.

Corporate cash holdings were increased to 17.7% of US GDP, well above the long-term range of trendline. During the second quarter last year, cash soared to 21% of GDP but the percentage declined as GDP rebounded.  Since many consider cash to be a stranded asset, these levels could become an economic drag.  There had been a decades long upward trend in this ratio, so the current reversion back toward the trendline is welcome.  However, as these levels are unprecedented, the long-term effects remain to be seen.  

Corporate cash allocations were fairly steady over the past year.  Cash + checkable deposits held steady at about 50% of corporate cash.   Time deposits were flat at 8%, but money market funds stabilized at 16% of corporate cash.    

Checkable deposits and currency remained near the all-time high at 51% of corporate cash.  The percentage had been stable at 20% for more than ten years but began a long upward trend following the 2008 financial crisis as the Fed expanded the money supply and interest rates remained near zero. 

Time deposits now account for 8.4% of corporate cash, near the lower end of its recent historical range but up in the recent quarter.  This is likely due to the low rates resulting from ten years of quantitative easing.  

The inverse relationship between time deposits and checkable deposits suggests that time deposits may be poised to increase once QE tapers or ends.

Money Market Funds may have established a bottom.  During the quarter MMF assets remained at a 25-year low, at 15.7% of corporate cash.  That level was last seen in March 1997. Assets are now barely one quarter of the peak 59% level of December 2008.  

Commercial & Industrial Loans are an important source of corporate liquidity.  Many companies actively drew down credit lines to further build their liquidity buffers during 2020.  Now they seem to be trimming a bit.  C&I loans are down 3.3% to $2.4T year to date but steady in the past quarter.

In conclusion, current liquidity markets represent a challenge for both treasurers and bankers.  Although the market is awash in liquidity, the Fed has become such a dominant player that traditionally reliable market signals are both distorted and muted.  Yield spreads among assets classes are compressed.  What is the “true” cost of capital, the “true” yield curve slope and the “true” credit risk premia?  Tapering, tightening, inflation, debt / budget brinkmanship and taxation issues are just a few of the wild cards.

To learn more about these findings, register here for our January 20 Quarterly Liquidity Briefing webinar, which we are co-sponsoring with Safened, US.  Topics include corporate and bank liquidity, Fed policy implications and a deep dive into recent FDIC guidance on brokered deposits.

About The Carfang Group.  

The Carfang Group advises our clients on the strategic and regulatory issues surrounding Treasury, Payments, Liquidity and Transaction Banking.  We oversee the deepest and broadest LinkedIn groups on key Treasury, Banking, Liquidity, Payments and Regulatory topics via our Idea Exchange and Career Network.  Visit https://www.thecarfanggroup.com.

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