Companies Hold Cash As Banks Struggle To For Deposits

During the pandemic, most people worried about savings, as unemployment numbers spiked and businesses closed. Corporations did the same. Now, as the economy begins to recover and states are reopening, the banks serving such corporations have a desperate plea for their corporate customers: Stop depositing money.

Bond-buying programs, loans, and lowered interest rates from the federal government in March 2020 made it easier for companies to raise funds at a reduced cost. That led to an influx of deposits by companies, and the money has been sitting ever since. There are little returns in holding cash, but companies such as Verizon and AT&T say they have no plans to move the money elsewhere. In addition, companies have not been borrowing from banks, making opportunities to give income-generating loans scarce.

To ease the pressure, banks are urging companies to think about different strategies. In the meantime, banks are asking customers to move some of their funds to a smaller bank, or implementing reverse tiering, a strategy where clients get lower returns for additional deposits. Banks are also utilizing money-market funds, which are a form of investment. However, low interest rates means the money is stored at the Federal Reserve overnight, which generates zero returns.

The Bottom Line: If companies refuse to start moving funds soon, banks will have to raise capital or begin refusing deposits. Companies will have to begin rejoining the economic stage to relieve the stress on banks.

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