Cash Visibility Can Help Treasurers Make the Right Decisions after TAG Expiry

With the expiry of the Federal Deposit Insurance Corp’s (FDIC) Transaction Account Guarantee (TAG) program confirmed for December 31, treasury departments now have a certain date to make decisions about where they want to hold their cash balances.

The TAG program was introduced in late 2008 as an attempt to protect US banks from significant withdrawals by corporations and high net worth individuals that suddenly saw the limited FDIC insurance protecting their balances as insufficient given the perceived potential for bank failure. At a time when keeping cash in bank was deemed risky, the government, through the FDIC, chose to guarantee any amount of cash held in an non-interest paying account. The program was extended several times, but it has now come to the end of its life. As of January 1, 2013, only cash balances up to $250,000 will be federally guaranteed.

The TAG certainly was effective. There was no ‘run on banks’ and cash balances held at financial institutions actually increased. According to the FDIC, $1.7 trillion in cash is held in the US’s largest ten banks. Besides protecting the banks, corporations also benefited as the program effectively removed the counterparty risk that corporate treasury teams would otherwise have to evaluate in determining where to maintain their cash and liquidity. With the flattening of the yield curve, many treasury departments found the best returns on cash were to take advantage of earnings credit offered by banks to partially offset bank fees. In fact, some treasurers were so bold as to move significant balances around throughout the month to maximize earnings credit benefits at each of their partner banks.

Now that the TAG and the unlimited FDIC insurance is expiring, treasurers and cash managers are (and have been for many months) re-evaluating the impact of counterparty risk on their decision to hold cash at banks versus diversifying into other investment alternatives. This is not to suggest that corporates have concerns about bank failures suddenly materializing – nothing could be further from the truth. But that doesn’t mean that treasurers shouldn’t be doing their due diligence to ensure that risk policies are current and are being followed.

So what does a re-evaluation of one’s cash held/investment strategy mean for the treasury department? There is variety of consequences, although few would argue that the requirement for full visibility into cash is paramount. It is the basic need in order to deliver any sort of analysis. For those that like to keep checklists, such a list would likely include the following:

> Cash Visibility – domestic and global
> Liquidity Visibility – what sources of cash exist (e.g. credit lines or short term investments) and how accessible are they?
> Working Capital – are there opportunities to increase DPO? Can DSO be reduced?
> Risk Policies – are Cash/Investment policies up to date? Are risk limits being violated the moment TAG protection expires?
> Evaluation of investment opportunities – are we easily able to evaluate our options including overnight returns, earnings credit, money market funds, other securities, repaying debt or even taking supplier discounts. Can we see the effect on cash each option creates?

While it is unlikely that action literally needs to be taken on December 31st, it is prudent to ensure that visibility into cash is optimized, along with the proper assessment of the increase in potential counterparty risk that an organization’s cash balances are exposed to as of January 1st. If as a Treasurer, you don’t have the visibility, automation, or information that you need then perhaps a review of your treasury technology may be something to consider.

December 21, 2012