Businesses looking to protect their cash by parking it in deposit accounts are quickly becoming a greater risk for banks.
A survey released Tuesday shows more than half of the cash held by U.S. companies is sitting in various bank accounts rather than other types of investment vehicles. While cash at banks is rising, hardly any of those depositors are applying for loans.
The dilemma for bankers is whether to accept such large deposits without a loan attached to produce any return. Many banks are choosing to grudgingly open the account and suffer from shrinking net interest margins rather than reject a business.
"There's a phrase used in our industry that 'cash is trash' instead of 'cash is king' because there's so much liquidity," says Gregory Mitchell, the president and chief executive at First PacTrust Bancorp (BANC) in Irvine, Calif.
"It is really attacking margins for banks," Mitchell adds.
Since 2010, multinational companies have been harboring more cash in bank accounts than money market funds and U.S. Treasuries, according to the annual liquidity survey from the Association for Financial Professionals in Bethesda, Md. Cash inflows have really picked up over the past year as concerns over the safety of corporate funds have reached new highs.
"The growth in bank deposits from last year is a lot higher than what we thought," says Tom Hunt, the association's director of treasury services. "Cash is now the safe haven. [Corporate treasurers] want to report to the board that there are no changes" in the investment portfolio.
The percentage of corporate cash held in banks accounts stood at 51% in May, marking the highest level since the survey started seven years ago. This year's percentage compares to 42% a year earlier and 23% in 2006.
Hunt, who is a former corporate cash manager, says that 77% of the companies surveyed value security the most, compared to just 2% that are insisting on yield.
The fear is not shocking to those who closely follow liquidity trends in the financial services industry.
"Really there is no surprise," says Dan Geller, an executive vice president at Market Rates Insight in San Anselmo, Calif.
"The bottom line is the uncertainty" over issues such as health care costs, corporate taxation and global economy, Geller says. "A bank deposit is hardly getting any interest, but at least you will not lose a dime on your principal. It's just be safe, sit and wait. That's the bottom line."
Consumers share in that uncertainty, but the biggest difference for banks is that corporate accounts tend to be larger, more complex and have higher interest rates. Bankers spend more time and money managing business accounts.
"We've opened 1,000 small -business accounts over the last year and for a small bank like ours, that's not insignificant," Mitchell says.
Banks have already been lowering their deposit rates to well below 1% to compensate for the ongoing influx of deposits.
Still, Hunt says that banks are typically paying better rates than mutual funds and continue to have the full guarantee of the Federal Deposit Insurance Corp. on noninterest-bearing accounts until the end of this year.
"You can earn 30 basis points if you hold the balance in a bank account as opposed to a mutual fund that's typically paying 5 basis points," Hunt says. "For a lot of companies, they don't have to deal with the hassle of what's in a money market fund."
The Association for Financial Professionals found that more than three-fourths of the survey's respondents would consider pulling more money out of money market funds if the Securities and Exchange Commission passes stricter accounting requirements on such funds.
As banks run out of room to cut rates, Geller says they could resort to a reverse interest rate charge. Last year, Bank of New York Mellon (BK) said it would charge a 25 basis-point interest rate for its large accounts. As cash continues to climb, other banking companies may have no choice but to follow that lead.
"If deposits keep piling up and loan demand remains low, we could reach a point where banks resort to this to compensate for other expenses" like increasing FDIC insurance premiums, Geller says.
For the most part, bankers like Mitchell have accepted the painful deposit growth as a near-term way of life. The hardest part to accept, he says, is that the economy needs the cash infusion more than the banks.
While 61% of the nearly 400 companies surveyed reported higher operating cash flows over the last 12 months, just 15% of that growth came from acquisitions or launching a new operation.
"There's a danger to the U.S. economy because we need to put those assets to work" through the expansion of business, Mitchell says. "And cash sitting in banks is really not producing a lot of jobs."
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