Banks are discovering that holding cash can be lucrative again
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Suddenly, everybody wants your cash.
As recently as last year, many US and European banks were actively trying to get out of holding clients’ ready money because they were awash with deposits.
The trend was quite extreme in Europe where central bank rates had been negative for years. UBS and Credit Suisse, among others, were charging their wealth management customers as much as 0.6 per cent simply for the privilege of having a large balance in their accounts. But US banks too kept cutting the interest rates they paid on corporate deposits in the hope of getting customers to go elsewhere.
Money market funds and institutional cash management products, meanwhile, were paying next-to-nothing returns, and global asset managers were still having to subsidise them to keep the business going.
Now the worm has turned. Apple and Goldman Sachs are teaming up on a no-fee high-yield savings account. Some UK banks are offering regular clients special savings accounts that pay as much as 5 per cent. UBS has finally scrapped its cash balance fees, and institutional cash managers are telling me that they are actively plying corporate treasurers with other services to make their offerings more attractive.
This, of course, is monetary policy in action. Rising interest rates and the rolling off of central bank bond buying are reviving dim memories of what it means to live without free money.
Lenders profit by charging more for loans and credit lines than they pay out to get deposits. But this “net interest” income has been squeezed by years of rock bottom rates. Now it is now shooting up as banks immediately pass on higher rates to their mortgage and corporate loan customers, but move more slowly to raise rates for savers.
Wall Street giants and scrappy fintechs alike this week have reported substantial jumps in net interest for the quarter that ended on September 30, and the main UK banks are expected to report a similar bonanza. Slow moving custodian Bank of New York Mellon was among the biggest winners, with a 44 per cent increase year on year.
Now that holding cash can be lucrative again, of course more financial institutions want it. But competition is rising within the banking industry and from brokers and asset managers which offer money market funds and other products that pay better rates.
Even though retail deposits tend to be sticky, customers read the headlines and they are starting to go in search of better deals. US retail money market funds have seen assets rise 10 per cent since the start of June to $1.55tn, although some of that is coming out of choppy equity markets, according to the Investment Company Institute.
Business customers, who have employees charged with making sure they get the best rates, are also pulling out their cash. Corporate deposits at JPMorgan, Citi and Wells Fargo have declined by nearly $120bn over the past year. But here, the money is not just shifting over to institutional money products. The ICI reports net assets have dropped slightly since June, and BlackRock, Morgan Stanley and JPMorgan’s cash management units between them reported nearly $110bn in outflows in the last quarter.
Some companies are opting to buy bonds to take advantage of rising yields. But many are rethinking their approach to cash at a time when inflation has raised the cost of having it do nothing.
“During the pandemic everyone went out and raised a lot of money. Now they are figuring out how much they still need,” says a veteran cash management banker. “There’s less lazy cash sitting around on corporate balance sheets.”
Other financiers agree that some of the liquidity that built up during the pandemic is starting to drain out. Gary Shedlin, BlackRock’s chief financial officer, blamed the cash management outflows on “a general reduction in corporate cash levels”. Volatile markets have made it harder for some companies to replace debt that rolls off: high-yield bond issuance has been sharply lower this year.
Bankers say that many companies are finding they have better use for their extra money. That may be strengthening supply chains and building up inventory, capital expenditure, or the perennial favourite, share buybacks.
More worrying is the idea that money-losing companies are running out of cash now that investors have turned picky about topping them up. JPMorgan Chase CEO Jamie Dimon has predicted that US consumers have six to nine months of spending left in their bank accounts before they pull back and tip the economy into recession. How many start-ups are in a similar boat?