From the April/May 2012 issue of Treasury & Risk magazine

No Safe Harbor for Cash

When unlimited FDIC insurance comes to an end, a huge wave of corporate cash could make a move. But where will it go?

A perfect storm could be brewing for treasuries with lots of cash. Companies have unprecedented amounts of accumulated cash sitting in bank accounts, protected by unlimited Federal Deposit Insurance Corp. coverage if the accounts don’t earn interest. But the Transaction Account Guarantee (TAG) program that provides this safe harbor is set to expire at year-end. Normally the cash could flow into money-market fund (MMF) accounts, treasurers’ favorite alternative to bank balances, but the Securities and Exchange Commission is weighing new regulations for money funds that many treasury executives say would make them toxic. A huge wave of money could be rolling toward an unknown shore. Safety is not threatened, but moving that much cash requires planning.

Companies have been building cash reserves since the economic crash and credit freeze, notes Anthony J. Carfang, founding partner of Treasury Strategies, a consultancy that tracks the cash buildup. The total has hit $2.2 trillion, he reports, and it continues to grow by 5% each quarter.

The SEC is also considering requiring funds to hold more capital and placing limits on fund redemptions.

“Any kind of holdback would be a deal killer for our members,” says Brian Kalish, finance practice lead at the Association for Financial Professionals. “Philosophically, they can accept floating NAV, but the accounting could be a huge operations headache. Higher capital requirements for the funds would simply mean lower yields.”

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