Corporate Cash Levels in US Reach New High, says Fed

The amount of cash held by corporations in the US increased by 2.5% in Q3 2012 to a new high of US$1.73 trillion, according to the latest US Federal Reserve figures released yesterday. 

Corporate cash overall has increased by more than 20% over the past four years, show the Fed figures, rising in total by $304bn since the financial crisis first hit in 2008. As a percentage of US gross domestic product (GDP), cash levels are relatively stable however, at 11%, which is only slightly above the long-term average. 

The ‘new normal’ it appears may in fact be a reversion to how things used to be with large companies sitting on big cash reserves to see them through a ‘rainy day’. Of course, money that is keep by the treasury to guard against counterparty risk, liquidity risk and other factors, is not being invested in new equipment or jobs, however, so there is always a fine line between innovating and playing it safe, with treasurers erring on the side of caution at the moment due to slowing global economic outlook. 

The unprecedented level of corporate cash levels is being driven by a number of factors. US corporate treasurers remain concerned about the potential expiration of unlimited Federal Deposit Insurance Corporation (FDIC) insurance at the end of this year, with a possible extension being caught up in political wrangling; stalled money market fund (MMF) regulations, which could be reignited are a worry; the Basel III capital adequacy framework, which the US has announced it won’t now implement until next year; the on-going eurozone crisis; and general counterparty risk due to worsening economic headwinds are all contributing to the caution. 

The US fiscal cliff is no doubt playing a part in corporate cash hoarding too, and another factor is likely to be the near tripling of tax rates on dividends in the US, which is driving some companies to increasing their dividends, accelerating January dividend payments into 2012 and paying one-time special dividends before 2013. 

According to the Treasury Strategies consultancy, “treasurers are concerned about both the economic outlook and the regulatory outlook. As a result caution prevails. On the one hand, it is difficult to resist borrowing in this current ultra-low interest rate environment. On the other hand, there are few places to park this money while it awaits investment in the business.” The conflicting requirements facing treasurers are certainly a novel set of demands compared to the usual practice of the last decade where leveraging was rife. A ‘new normal’ is indeed evident in the figures. 



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