The recent pandemic created a cloud of uncertainty for managers of financial institutions. Because of this uncertainty, many banks and their lenders were forced to strengthen their cash reserves in anticipation of loan losses.
However, with help from multiple fiscal stimulus packages, the worst-case scenarios have so far been avoided, but now a new problem has developed. Banks now have too much cash on hand as they enter what is expected to be a summer of economic expansion, and they need productive places to invest the excess cash until demand returns.
Financial Markets Flooded with Easy Money
Economic shutdowns early last year brought bond markets to a standstill. Corporate debt became untouchable overnight, and the dollar’s value soared in currency markets. The Federal Reserve’s response was to expand their balance sheet with not only purchases of more Treasury Securities and agency debt, but also expand purchases into the corporate and municipal bond markets.
The transactions in secondary markets have trickled down to the banks that ultimately hold the security dealer’s cash. The amount of spending done by the Treasury department also flooded banks with reserves though individual payments and small business loans, and there is still money to be spent in the American Rescue Plan. With the majority of early stimulus being saved or spent on debt, it is no surprise that banks are holding around twice the amount of reserves that they held before the pandemic.
All this excess cash has pushed interest rates in overnight markets to the zero bound, and they have not moved in over a year despite encouraging economic news. In addition, these reserves can weigh on a bank’s returns, so some institutions have released some of these reserves into earnings. Investors want to know how these newly released reserves will be invested as the economy expands.
ADM Provides Banks with Liquid Investing Options
Banks are now searching for investment options for these newly released reserves, but unfortunately, relatively few companies are seeking loans in this economy. On the other hand, with hopes for a strong economic rebound around the corner, individuals may be looking to spend some of their saved-up stimulus in the coming months, and that could begin to reduce reserves. If this scenario plays out banks could see deposits dwindle as the economy recovers.
In the absence of loan growth, banks need a relatively liquid and safe investment for their excess reserves to be prepared for pent-up demand, should it arise. That is where our company, the American Deposit Management Co. [ADM], can help. At ADM, we leverage our proprietary fintech to provide banks with the liquidity and return they need for excess cash.
Earn More, Risk Less® with ADM
At ADM, we have a nationwide network of FDIC insured financial institutions that need your cash. Because of this, we can spread your excess deposits among our network while maintaining FDIC coverage and the most competitive rates, with just one point of contact.
What sets us apart from our competition is the ADM team, a.k.a. our secret sauce, not just because of our decades of experience in the industry, but because doing a great job is fun for us. We look forward to working with you.
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