In our last blog I wrote about the mutual fund industry creating two kinds of funds; retail and prime and non-prime institutional. Institutional funds would have a fluctuating NAV and could carry liquidity constraints called “gates” unless the underlying assets were government or agency securities.
Now Deposits May Require Fees
Last week the Wall Street Journal reported that JP Morgan was going to begin charging fees to certain institutional clients for bank deposits. Characterizing those institutions as private equity funds, foreign banks and hedge funds, the article suggests that these types of deposits create systemic risk and are most likely to flee major banks in periods of financial insecurity. (Click for WSJ link)
I knew right away that this was a propaganda piece because private equity firms and hedge funds do not carry material cash deposits at banks. So the genesis of these new rules is the EVIL EMPIRE creating systemic risk of liquidity meltdowns? Highly improbable but the WSJ was just passing on someone’s message.
A New Approach to Bank Funding?
Short term bank deposits have always served as a cheap source of funding for financial institutions. Now, thanks to the long reach of Dodd-Frank, banks must reserve against deposits most likely to exit the banking system in a financial meltdown. In some cases depositors will be charged fees for the privilege of utilizing the US Banking System. At least in my lifetime, this is a new phenomenon and a major change in the way banks fund themselves. It is also interesting that the banks are following the leaders in the mutual fund industry by shaking up the savers.
Where to Stash Your Cash?
My question is where the money will go when the real depositors (think corporations and pension funds not private equity funds and hedge funds), decide they don’t want to pay fees? They can’t put cash in non-government institutional money market funds without agreeing to significant limitations like a floating NAV and gates and fees. So, if you are a corporation with $100 million of cash on its balance sheet you either throw in the towel and fund the government or you manage your own fixed income portfolio? The WSJ article suggests that there may be exceptions based on historical customer relationships.
Dodd Frank Hijacked By Fiscal Policy?
Is this really about systemic risk or forcing cash to work in the economy? I could argue that the recent changes to how institutional cash is treated by banks and mutual funds are really a validation of perceived deflationary risk. By forcing the cash to move out of comfortable, time tested products there is the added benefit that it might get invested in the general economy.
If you are really serious about keeping that cash as a security blanket or for corporate opportunities or for general working capital and you want to access that cash when you need it, it looks like you are going to be buying government and agency securities. It will be interesting to see what the banks do to keep deposits?
Chances are high that the new form of bank “deposits” will have a government wrapper of some sort, just like the money market industry.
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