Liquidity Management in the New Era
Tampa AFP
Jeff Avers
Treasury & Payment Solutions
Liquidity Strategy & Consulting
June 2013
Corporate Cash Management
Short-Term Investments
Wire – ACH – Card
Lockbox – Branch – Card
Payments
Deposits/Receipts
Checks/Controlled Disbursement
Wire – ACH – Cash Concentration
Short-Term Borrowing
2
Regulatory Reform – A Sampling
Higher bank interest expense on deposits
Reduced Revenue Streams
 Volcker Rule
 Potential divestitures
Reduced Fee Income
 NSF/Overdrafts (Regulation E)
 Debit Interchange (Durbin Amendment)
Increased Balance Sheet Costs
 Basel III Capital Ratios
 Basel III Liquidity Coverage Ratio
Increased Fees
 Uncollateralized daylight overdrafts
 FDIC
Client communication costs
Development costs for new products
Employee training
Reduced value of deposits
 Reg Q repeal
 Basel III - Higher liquidity levels needed to
support the commercial business
Increased cost of compliance & oversight
 Human, Systems, tracking and reporting
Increased emphasis on minimizing marginally
profitable and unprofitable relationships
 Discontinuation of “Free Checking”
 Collateralized Deposits
 Syndicated Credit Facilities
Increased Customer Expenses
Increased Bank Expenses
3
Liquidity Management in the New Era
Agenda:


Past, Present & Future of Short-Term Investing

Risk and Return

Efficient Frontier

Today’s Investing Opportunity

Treasury Yield Curve

The Reward for Credit Risk

Market Rates

Key Insights from 2012 AFP Liquidity Survey

25 Year Trend in Corporate Cash
The Perfect Storm

Unlimited FDIC and the DDA Bubble

The Impact of Reg Q Repeal

Past and Future Role of Sweep


The New Role of Liquidity
Change in Allocation of Investments
4
Objective of Today’s Discussion
Make These Three Key Points:

The basic principals of liquidity investing are no different today than in
the past

The dynamics of today’s short-term investment environment should lead
you to construct a portfolio whose composition is different than pre-2008

Financial Regulatory Reform has already had an impact on liquidity
management practices, and will continue to do so going forward
5
Risk & Return – Past, Present & Future of Short-Term Investing
RETURN %
As investment risk increases, so does the expected return
RISK %
Investopedia defines the risk-return tradeoff as “the principle that
potential return rises with an increase in risk. Low levels of risk are
associated with low potential returns, whereas high levels of risk
are associated with high potential returns. According to the riskreturn tradeoff, invested money can render higher profits only if it is
subject to the possibility of being lost. Because of the risk-return
tradeoff, you must be aware of your risk tolerance when choosing
investments for your portfolio.”
Cash investors should strive to understand the concept of riskreturn when managing their short-term cash portfolio. The riskreturn tradeoff implies that higher yielding investments carry a
higher level of risk, with US Treasuries (UST) generally being
considered to offer the ‘risk-free’ rate. All other short-term
investments are considered to carry a higher degree of risk than
UST’s, and should therefore offer a higher rate of return
 Investors should consider the risk-return tradeoff as they view the yields associated with each investment option
 For investment products that involve an underlying portfolio of securities, such as money market mutual funds
and/or Local Government Investment Pools (LGIPs), investors should review the portfolio holdings before
investing to make sure they are comfortable with the portfolio’s (1) issuers and (2) asset classes for all of the
securities held in the portfolio
— Some investors may not be comfortable with foreign issuers, broker-dealers or finance companies, while
others may not be comfortable with asset-backed securities (ABS) or commercial paper
— A review of the portfolio’s holdings will reveal any discrepancies with the investor’s risk tolerances
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Risk & Return – AAA Rated LGIPs
Fees
2.9 bp
3.3 bp
2.4-3 bp
Source: State Treasurer’s Website for each State
7
Risk & Return - The Efficient Frontier*
The upward sloped curve (BCD), called the efficient frontier, is the
optimal set of portfolios for every given level of risk and expected return
Return
 From the portfolios that have the same return, the investor will prefer the portfolio with
lower risk
— B is the efficient portfolio for Return Level 1
 From the portfolios that have the same risk level, an investor will prefer the portfolio with
higher rate of return
— C is the efficient portfolio for Risk Level 2
C
D
Return 2
B
A
Return 1
Risk 1
Risk 2
* Developed by Harry Markowitz, a Nobel Prize winning economist, as a component of Modern Portfolio Theory
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Risk
Today’s Investing Opportunity: The Yield Curve
The World Isn’t Flat… But Yields Sure Are
Liquidity
investors have
historically
focused on the
0-24 month
segment
Source: NYT Treasury Yield Curve as of May 7, 2013
The 0-24 month portion of the fixed-income yield curve is extremely flat,
offering very little incentive to extend investment maturities or portfolio duration
9
Today’s Investing Opportunity: Reward for Credit Risk
The Market is not offering much return for taking on additional credit risk
“Risk Free”
Corporate Risk
Risk Reward
Treasuries
Yield
Corporates
Yield
Credit Spread
3-month T-Bill
0.04%
90-day CP
0.11%
0.07%
6-month T-Bill
0.08%
180-day CP
0.23%
0.15%
2-year T-Note
0.22%
2-year AA
Corporate
0.46%
0.24%
Source: WSJ Money Rates as of May 7, 2013
 Investor reward for taking on credit risk is minimal, providing very little incentive to do
so
 Today’s liquidity investors are focused on principal preservation and liquidity, with
very little emphasis on yield
 Liquidity investors have taken advantage of the generous ECR offered by the
banking industry
 Bank deposits have replaced money market mutual funds as the primary liquidity
investment vehicle
 Considering the Fed expects rates to remain at similar levels until late 2014 or 2015,
we should continue to expect this to be “the new normal”
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Market Rates for Cash Investment Instruments
Alternative Cash Investment Options
Short-term Investment Instrument
Rate as of
7/13/2011*
Rates
11/26/2012
Rates
12/18/2012*
Rates
5/31/2013*
Overnight Instruments
52-Week*
Low
High
Fed Funds
6 bps
16 bps
19 bps
12 bps
10 bps
19 bps
Repo
2 bps
29 bps
22 bps
14 bps
6 bps
45 bps
SunTrust ECR (Analyzed Business Checking)
35 bps
25 bps
25 bps
25 bps
25 bps
35 bps
25/5 bps
25/5 bps
25/5 bps
25/5 bps
25/5 bps
11/26/2012
12/18/2012
5/31//2013
Low
SunTrust ECR/Rate Pd (Analyzed Interest Checking)
30-Day Instruments
Treasuries
High
2 bps
15.5 bps
1.5 bps
3 bps
1.5 bps
17.5 bps
Commercial Paper
12 bps
14 bps
5 bps
8 bps
3 bps
15 bps
Eurodollars
12 bps
12 bps
12 bps
12 bps
12 bps
23 bps
Libor
18.7 bps
20.9 bps
21 bps
19 bps
19 bps
29.6 bps
SunTrust Money Market Account Rate
25 bps
15 bps
15 bps
15 bps
15 bps
25 bps
90-Day Instruments
7/13/2011
11/26/2012
11/30/2012
3 bps
10 bps
Commercial Paper
15 bps
Libor
5/31/2013
Low
4 bps
4.5 bps
4 bps
16 bps
12 bps
8 bps
24.9 bps
31.2 bps
30.9 bps
Eurodollars
15 bps
20 bps
20 bps
AAA-Rated Taxable Money Funds: 7-day Yield as of
6/30/2011
10/30/2012
11/30/2012
4/30/2013
Crane Treasury Institutional MF Index
1 bps
1 bps
1 bps
1 bps
1 bps
1 bps
Crane AAA Prime Institutional MF Index
4 bps
9 bps
8 bps
5 bps
5 bps
10 bps
High
Treasuries
High
12.5 bps
Market rate
movements have
been mixed
• As of the end of May
overnight rates have
contracted slightly, while
30 and 90-day rates
have shown mixed
movement versus
December 2012
• One-month and threemonth Libor are at their
52-week lows
• This implies the
market has both
lowered its
perception of bank
risk, and implies
demand for bank
borrowing has
declined…
confirming that
banks are long on
deposits
SunTrust Sweep Yields
As of May 2013
10 bps
20 bps
27.5 bps
27.5 bps
58.25 bps
20 bps
20 bps
28 bps
Low
High
Master Note
Nov 2012*
April ‘13
Low
18 bps
18 bps
15 bps
9 bps
18 bps
31bps 11
28 bps
22 bps
21 bps
33 bps
Local Government Investment Pools: Monthly Yield as of:
June 2011
Oct 2012
Georgia Fund 1 LGIP (Monthly yield)
13 bps
Florida Prime LGIP (Monthly yield)
23 bps
Repo
Eurodollar
Federated
Prime Fund
30/20 bps
3 bps
10 bps
4 bps
Federated
1 bps
Treasury
Fund
• Rates obtained from (1)
WSJ Money Rates, (2) Crane
Data (money funds) and11
(3)
State-specific LGIPs
Past, Present & Future of Short-Term Investing
1
Findings from 2012 Association of Financial
Professionals (AFP) Liquidity Survey
Key Findings Among Investors
Comments / Implications
98% of institutional investors consider safety of principal (77%)
and/or liquidity (21%) to be their primary objective
Yield has always been a tertiary objective…
however, investors are actually treating it as
such today
51% of aggregate portfolio balances were held in bank
deposits, with 65% of investors allowing more than a 50%
portfolio allocation
Investors view this as a relatively safe haven
and have consolidated the majority of their
liquidity into bank deposits
19.2% of aggregate balances are allocated to money market
funds (12.7% to prime money funds and 6.5% to treasury
money funds), 4.8% to CP, 4.2% to UST’s, 3.6% to Government
Agencies and 3.2% to repo
• Investors are no longer diversifying their
portfolio across as many asset classes as
has been the case in the past
• Money Funds have lost almost 50% of their
allocation versus 2004 (19.2% vs. 36%),
when Fed Funds were 1% at the bottom of
the 1999 to 2006 rate cycle
72% of instruments have maturities of 30-days or less with 11%
at 91+ days… with 86% of investors expect their average
maturity to remain the same or shorten further going forward
There is very little incentive to move out the
yield curve, with investors unwilling to take the
associated liquidity and/or interest rate risk
Only 78% of organizations overall, 86% with sales over $1B,
65% with sales under $1B and 80% of net investors have a
written investment policy1
Companies are exposing themselves to risks
that could be easily avoided and/or contained
1Refer
to Whitepaper published by SunTrust entitled Why Businesses Need to Reassess Their Investment Policies Now
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Corporate Cash Has Been Increasing
Corporate Cash ($Millions)
$2,500,000.00
Trends In Corporate Cash
$2,000,000.00
Grew from $500 Billion in
1988 to more than $2 Trillion
at the end of 2012
$1,500,000.00
$1,000,000.00
$500,000.00
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$-
Checkable deposits as Percent of
Total Corporate Cash
Checkable deposits as a
percent of Corporate Cash
have increased steadily
since 2008
• Relative Value of ECR
• Unlimited FDIC through
12/31/2012
• January Fed data indicates
no significant change since
• December 2012
30%
25%
20%
15%
10%
5%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0%
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Corporate Cash Percent Has Been Declining
Total Financial Assets
Corporate Cash Pct.
$18,000,000.00
$16,000,000.00
$14,000,000.00
$12,000,000.00
$10,000,000.00
$8,000,000.00
$6,000,000.00
$4,000,000.00
$2,000,000.00
$-
Long-term Trend
• Declining over time
• Declined from 20%
to 13% over 25 year
period
• Increases during and
after a recession
Five-Year Trend
• Slight uptick in 2009
in response to the
recession, but seems
to be stabilizing
Corporate Cash as % of Total Financial Assets
25%
20%
16%
14.1%
15%
10%
13.2%
5%
2007-09
Recession
0%
1990-91 Recession
13.1%
2001 Recession
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The Perfect Storm
There is a potential “Perfect Storm” brewing
Each event individually is likely to
reduce the portion of corporate cash
held in bank deposits. This
combination of events, slated to
happen within a 12-24 month period
of one another ,will serve to reduce
and redistribute bank deposits in
favor of the following destinations:
Bank Deposits










Expiration of Unlimited FDIC
Economic Recovery
Rising Rates
Repeal of Reg Q
2A-7 Money Fund Reform
Redeployment of Corporate Cash
Likely Future
of Corporate
Cash Cash
Likely
FutureDestinations
Destinations
of Corporate
Alternative Cash Investment Options
 Money Market Funds
 Investment Sweep
 US Treasuries and Government Agencies
 Commercial Paper and other cash investment
Instruments
Non-interest-bearing DDA will convert to interestbearing DDA and/or investment sweep
Cash will be used to fund Capital Expenditures,
Acquisitions, and for other strategic purposes
The percent of corporate cash maintained in bank
deposits will likely begin to revert to pre-2008 levels
 2007 – 27% of corporate cash held in bank deposits
 2012 – 51% of corporate cash held in bank deposits
15
¹
Impact of Reg Q Repeal
When Interest Rates Rise, The Repeal of Reg Q1 plus Money Fund Reform
Could Drive $1T+ onto Bank Balance Sheets… Provided the Banks Want
the Liquidity
In countries allowed to pay interest on checking, corporates maintain 60-70% of
their liquidity in the banking system
Percent of Total Corporate Liquidity Held in Bank Deposits*
80%
60%
40%
20%
0%
This is a positive outcome
for U.S. banks only if loan
demand and deposit growth
are in synch
US
Reg Q
France
UK
Post-Reg No Reg Q
Q
*Source: 2010 AFP Liquidity Survey and Treasury Strategies ’ Global Liquidity Research
¹ Repealed in 2011, Regulation Q was a 1930s Depression Era regulation that disallowed banks from paying interest on commercial checking accounts
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Impact of Reg Q Repeal
A Likely Unintended Consequence of Reg Q Repeal
Reg Q
• For the typical treasury management bank, 60-70% of the revenue
and 80-90% of profit comes from the spread on non-interestbearing deposit
Reg Q Repealed
• Banks are eligible to pay interest on corporate checking deposits
Post-Reg Q Environment
• The Banking Industry will likely need to revise the pricing structure
of the Treasury Management business in order to reflect the impact
on revenue and profitability of the Repeal of Reg Q… and the
associated reduction or elimination of non-interest-bearing deposits
17
The Economic Recovery May be Funded by Cash
Redeploying Cash vs. Borrowing to Fund Capital Expenditures
Percent of Companies Self-Funding their 2010 and 2011 Capital
Expenditures and Planning to Self-Fund in 2012
Source: Greenwich Market Pulse, January 2012
Given the build-up of cash over the last 3-4 years, companies have been self-funding
a major portion of their capital expenditures… and are likely to do so going forward
Banks usually benefit from an economic recovery through the expansion of their
lending and/or underwriting activity… which may be slow in coming this time
18
The Future of Sweep
Post Reg Q Repeal, the Primary Purpose of Sweep Has Changed
Primary Purpose of Sweep
Old Paradigm

Post-Reg Q


Obtain yield on idle cash balances
Diversify away from bank risk
Obtain yield in excess of interest-bearing DDA
Predominant Sweep Vehicles








Money Funds
Eurodollar Deposits
Repo
Bank Parent Commercial Paper
Repo (eliminate credit risk)
Money Funds (diversify away from bank risk)
Bank Parent CP (yield enhancement)
Alternative ‘off balance sheet’ products
Total U.S. Sweep Balances ($B)
$800
$700
$600
$500
$400
$300
$200
$100
$2002
2003
2004
2005
Source: Treasury Strategies’ proprietary research; Commercial
Deposit/Sweep Study & Global Corporate Liquidity Research
2006
2007
2008
19
2009
2010
2011
2012 YTD
Deposit Investment Allocations May Return to Pre-2008
Levels
1
Source: 2012 AFP Liquidity Survey


Cash investors have been increasing their allocation to bank deposits over the last six
years, while simultaneously decreasing their allocation to money market mutual funds
If there is more certainty around the future of money market funds, when rates begin to rise
cash investors might reallocate their portfolios to be weighted no more than 25-35% in bank
deposits, which is consistent with pre-2009 levels
20
20
Summary of Today’s Discussion

The basic principals of liquidity investing are no different today than in
the past

The dynamics of today’s short-term investment environment should lead
you to construct a portfolio whose composition is different than pre-2008

Financial Regulatory Reform has already had an impact on liquidity
management practices, and will continue to do so going forward
SunTrust Bank, Member FDIC. SunTrust is a federally registered service mark of SunTrust Banks, Inc. 04/13
21