Treasury Today – May 23, 2023
As troubled US bank First Republic is snapped up by JPMorgan Chase in another bank failure, a recent survey reveals a sharp spike in awareness of concentration and counterparty risk amongst corporate treasurers.
First Republic Bank has just been snapped up by JPMorgan Chase following an auction arranged by US regulator the Federal Deposit Insurance Corporation (FDIC). The failure of the San Francisco-based lender is the second largest in US history and the third in the country since March, coming on the heels of Silicon Valley Bank’s (SVB) collapse. J.P. Morgan will assume all of First Republic’s US$100bn-odd deposits while losses on the bank’s residential and commercial loans will be shared with the FDIC.
The ongoing crisis is sparking fears amongst US and European corporate treasurers of single counterparty risk and bank concentration. So finds ICD, the portal provider of money market funds (MMFs) and other short-term investments, in its latest 2023 Client Survey. Eighty per cent of US and European treasury teams surveyed are now “moderately or highly concerned” with bank and other counterparty concentration risk, says the report.
Concentration risk of any kind, whether in a single customer, specific employees, or owners in the supply chain, is dangerous for any company. But a key lesson revealed in SVB’s collapse and now highlighted again is bank diversification. For treasury teams that put their money in interest bearing money market accounts with their banks, because these accounts are still on the bank balance sheet, these assets are also at risk in a concentrated strategy. The ICD survey found that corporate treasurers current or planned investments in US bank deposits were down 31% from last year.
As corporate treasurers worry about the safety of their funds in the banking system, particularly in shaky regional lenders, they have shifted their cash into MMFs. Most ICD survey respondents (93%) from all regions said they planned on increasing or maintaining investments in MMFs this year, up 12% from 2022. “The vast majority of corporate treasury teams are risk averse and invest in MMFs to diversify their cash portfolios, maintain daily liquidity and earn a competitive yield,” says Tory Hazard, Chief Executive Officer at ICD. Elsewhere, 86% of UK/Europe respondents indicated they are investing in Short-Term Low Volatility Net Asset Value (LVNAV) MMFs.
Data from Refinitiv Lipper shows investors purchased a net US$42.68bn worth of money market funds in the week to 26th April, taking the cumulative inflows for the year to a massive US$427.4 bn.
In another trend reflective of the growing governance around investment by corporate treasury, 61% of respondents said they updated their investment policies last year or are updating them in 2023, clearly outlining where the company invests. The survey also revealed treasury investments in ESG products has fallen. 46% of organisations are invested in or are planning on investing in ESG or other socially responsible products, down from a three-year peak of 56% in 2022.
Scaled back treasury
The ICD survey also suggests treasury organisations are scaling back on investment this year. Sixty eight percent of respondents indicated the number of professionals in their treasury organisations has decreased or remained the same in the last year. Almost all treasury teams expect their responsibilities to increase or remain the same in 2023. Around half of respondents said they are currently engaged in or are planning a tech project.