Insight & Analysis

Where should I put my cash?

Published: Mar 2017

In light of Basel III, treasurers need to understand how the new regulation may affect their bank deposits and whether alternative investment vehicles might be worthy of investigation.

Deciding where to invest short-term cash has become more challenging in recent years. While the low interest rate environment has meant companies can expect little yield from their short-term investments, regulatory changes such as Basel III are prompting banks to re-evaluate the value of different types of corporate deposit.

“Basel III is a financial services industry event with material rippling effects to corporates,” comments Mario Tombazzi, Group Product Management Head, Liquidity Management and Account Services, Global Transaction Services, DBS Bank. He points out that Basel III requires banks “to adopt industry-wide measures to improve capital adequacy, reduce liquidity risk and enhance liquid asset quality and funding structure.”

For corporate customers, the implications of Basel III include increased lending costs as banks face a higher cost of capital and funding. Meanwhile, the operational deposit framework means that certain types of deposit are becoming more attractive to banks than others. An important distinction is made between operational deposits – ie deposits which are used for daily operations, such as cash management, securities settlement and payment remittance – and non-operational deposits, such as surplus cash, which may be more likely to be withdrawn in the event of a liquidity crisis.

While Basel III is aimed at banks rather than corporations, the new regulation does have consequences for companies around the world – and treasurers need to understand the implications for their businesses. According to Ong Shiwei, Global Head, Cash Liquidity Management Products, Transaction Banking at Standard Chartered, “The biggest challenge for corporate treasurers is probably the uncertainty, which is still the case for the implications on certain bank offerings such as notional pooling.”

Treasurers should also assess the impact of the new regulations on their existing bank relationships and solutions. Harjeet Kohli, CFO of Bharti Enterprises, notes that as banks adapt to Basel III, it is increasingly important for organisations to assess – or reassess – their liquidity and cash flow solutions, as well as the durability of these solutions and their ability to project surpluses accurately. “Treasurers/CFOs then need to be able to think how they invest to be able to manage the yields on investments, as regulations require banks to assess stability and quality of deposits as well under the new norms,” he adds.

Weighing up the alternatives

Where short-term investments are concerned, treasurers may wish to consider other investment vehicles for their short-term cash in light of the yield pressure placed by Basel III on wholesale deposits. However, for companies in Asia this may be something of a challenge. “In Asia there are very few alternatives,” says Philippe Jaccard, Head of Liquidity & Balance Sheet Management, Transaction Banking at ANZ. “Bank deposits are the overwhelming choice of companies.”

Nevertheless, there may be opportunities for companies to explore other short-term investment products such as money market funds (MMFs) and high-rated short-term debt. While money market funds are relatively new to the region, China’s MMFs now represent 12.6% of the global market according to ICI data.

When seeking to respond to the challenges brought by Basel III, it is important to have the right policy in place for short-term investments. An investment policy is unlikely to be updated very frequently – but market changes may prompt treasurers to revisit their policies to make sure that they remain relevant both for the company’s needs and for the prevailing market conditions.

In practice, not all treasurers will choose to revisit their investment policies – and treasurers in Asia may be less likely to do so than treasurers in other regions. That said, treasurers should take the opportunity to understand how regulatory developments affect their investments – and whether changes to the investment policy could be beneficial.

As Ong concludes, treasurers in Asia “should emphasise monitoring and gaining better visibility of their local currency exposures, and keeping their short-term investment policy agile to adjust to the continuously changing regulatory landscape.”

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