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How CEOs Can Navigate the Crazy World of Negative Interest Rates

Managing cash holdings used to be a relatively simple matter of plonking money in the bank and watching it earn a modest return. Now, the whole world of liquidity management is seemingly turning upside down, forcing CEOs and their treasurers to consider different investment strategies to avoid being punished for saving.

Fragile global economic growth has prompted many of the world’s central banks to cut interest rates to near-record lows, while new regulations, such as those outlined in Basel III, have forced banks to increase their emergency capital buffers. That hasn’t just made it harder for some cash-strapped companies to borrow, it also means that certain types of cash deposits are more acceptable to banks than others.

To complicate matters further, central banks in Europe, Switzerland and Japan have implemented negative interest rates. Britain, meanwhile, is getting close to joining the club, last month cutting its base cash rate to a record low of 0.25%.

Theoretically, negative rates mean that households and businesses, somewhat crazily, are paid to borrow money, while having to pay to put money in the bank. Practically, they have allowed some large companies to borrow money at rates next to nothing, while prompting banks to offer negative returns on deposit products.

The bottom line for CEOs is that the days of earning a few hundred basis points on a current account are now long gone.

“While that might not have been the most optimal way of managing liquidity, it wasn’t a value destroyer. Now, there has been a complete paradigm shift.”

“While that might not have been the most optimal way of managing liquidity, it wasn’t a value destroyer,” Lisa Rossi, head of global liquidity and investment product development at Deutsche Bank, told Chief Executive. “Now, there has been a complete paradigm shift.”

Time to explore M&A?
The problem of negative interest rates partly owes to business’ reluctance to spend. Around $1.7 trillion is currently being held on the balance sheets of non-financial U.S. companies, with nearly a third of that figure spread between just five: Apple, Microsoft, Alphabet, Cisco and Oracle, according to Moody’s Investors Service.

To be sure, the problem of negative deposit rates isn’t yet apparent in the U.S., where the Federal Reserve in December raised its funds rate target, albeit to a still-measly 0.25%-to- 0.5%. The country’s economic outlook, however, remains cloudy, while many U.S. companies are already exposed to negative rates through foreign subsidiaries.

“Part of it is economic and part of it is political, but I don’t see an end to negative interest rates in the Eurozone for some time,” Rossi said. “The Fed have indicated they’ll continue to raise rates, but we’ll have to wait and see how fast they implement the increases.”

In an upcoming white paper on liquidity management, Deutsche Bank says cash-rich companies may want to consider deploying capital through traditional means, such as M&A, dividends or upping spending on R&D.

But to do this right, Rossi recommends they start “scenario building” to identify where their cash will bring the most benefit. That could mean investing in better software, such as the latest artificial intelligence programs that allow executives to compare various strategies and outcomes with different market conditions and return-rate scenarios.

Possible solutions for the risk-averse
But for cash-strapped CEOs, or those reluctant to risk heavy spending, there are still ways they can optimize their cash.

Rossi says it could be as simple as considering 30-, 60- or 90-day term-deposit accounts. These are preferred by banks because they allow them to meet their 30-day stress test requirements, while paying better interest than a simple current account.

Achieving this could mean that CFOs will need to go to their CEOs and boards to request a change to mandated investment policies.

“It’s really not rocket science, but it’ s a way to achieve a more optimal outcome, whether it’s reducing your negative outflow, getting a flat rate, or even creating a return,” Rossi said.

Some term products also offer companies the opportunity to withdraw emergency cash without terrible penalties, funnel cash between subsidiaries or swap it in and out of different currencies to get more bang for their buck. CEOs also could explore the use of mutual cash funds or repurchase agreement (Repo) markets, where cash can be invested with banks using securities as collateral.

“We’ve gotten much more creative with traditional products,” Rossi said. “But it does require a little more thought on behalf of the customer and more planning, which is why forecasting is critical.”


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