The Association for Financial Professionals released a brief study yesterday entitled, "2013 AFP Business Outlook Survey, which surveyed corporate treasurers on plans for the new year and on some recent issues impacting cash management. AFP writes, "Beyond the immediate issues related to the fiscal cliff, the survey identifies other areas which financial professionals think Washington should address -- effective corporate tax rates, taxation on repatriated foreign earnings and regulatory relief -- that will ease the uncertainty currently paralyzing corporate decision-making. Survey respondents also indicate that organizations will begin to move cash and short-term investments away from bank accounts when (should) unlimited FDIC insurance currently available on non-interest bearing corporate bank accounts expires at the end of 2012." (Note that the Senate is expected to vote on the extension of unlimited FDIC insurance at 2:30pm Tuesday. See Politico.com and today's WSJ editorial for details.)
The survey says, "In an environment of uncertainty or where future prospects may look weak, some companies tend to build out cash reserves to ride out an expected downturn. Twenty percent of organizations have increased their cash and short-term investment cash holdings as a direct result of the possibility that the fiscal cliff could occur at the end of 2012. Should the fiscal cliff actually occur without any alteration, 26 percent of survey respondents expect their organizations will build out their cash holdings."
It explains, "But these organizations are the exceptions -- 73 percent of organizations have not altered the amount of cash that they hold against the possibility of the fiscal cliff while two-thirds of survey respondents do not anticipate their organizations will change the amount of cash that they hold should the fiscal cliff occur.... Other actions taken by organizations as a result of the threat of the fiscal cliff include: Shortened the duration of the short-term investment portfolio (cited by 22 percent of organizations that have taken an action)."
On "FDIC Unlimited Insurance," AFP's survey tells us, "According to the 2012 AFP Liquidity Survey, 51 percent of organizations' cash and short-term investment holdings are maintained in bank accounts. The share of such investments held in bank accounts has grown dramatically in recent years. As recently as 2006, the percentage of cash and short-term investment holdings held in bank accounts was 23 percent. There are a number of reasons for the shift of short-term investments into bank deposits, including organizations' greater preference for safety over yield as a result of the financial crisis and recession. But another factor is the availability of unlimited FDIC insurance on corporate (commercial) deposits held in non-interest bearing accounts. Corporate access to unlimited insurance was most recently extended with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, but this extension is scheduled to expire at the end of 2012."
It adds, "At the time of publication of this report, there were some calling for the continued availability of this unlimited FDIC insurance, but it is unclear whether such an extension would be agreed upon by Congress. Should unlimited FDIC insurance expire at the end of the year, 51 percent of organizations expect to move at least some of their cash and short-term investment portfolios away from non-interest bearing bank accounts into other investment vehicles."
AFP says, "Organizations that plan to reduce the amount of their short-term investments currently held in bank accounts if unlimited FDIC insurance expires after December 31, 2012 plan to reduce such holdings by a median of 20 percent. Twenty-eight percent of organizations that will reduce bank deposits will do so by between 10 and 24 percent while 21 percent of organizations will reduce these holdings by between 25 and 49 percent. Some organizations will make an even more dramatic shift: 20 percent of these organizations will reduce the size of their current bank deposits by at least half."
Finally, they write, "The most likely destinations for any cash and short-term investments removed from bank accounts would be money market funds and Treasury securities/agency bonds. These choices reflect the continued preference of corporate investors for the safety of their investments over any possibility of yield. Forty-two percent of organizations would move at least some of these funds into Treasury-based money market funds while 41 would invest in Treasury securities and/or agency bonds and 36 percent anticipate using prime money market funds as destinations for investments currently held in bank accounts."
