Regional Bank Stress Puts Spotlight on Cash Management
The challenges roiling some regional banks in recent days have stressed financial markets as investors and depositors have been forced to consider the basic safety of bank accounts. As in past crises, U.S. policymakers are stepping in to provide solutions for those banks suddenly facing an unexpected wave of withdrawals.
The situation will likely complicate the U.S. Federal Reserve’s fight against inflation. Officials must now balance any plans for continued policy tightening against efforts to quell market volatility and preserve investor confidence. The Fed will be aiming to shore up liquidity, both in terms of individual accounts and broader financial conditions.
The rapid developments have led to a change in investor sentiment. Previously, signs of persistent inflation had caused markets to reprice higher their expectations for the Fed’s terminal policy rate. As risks related to regional banks have moved to the fore, markets have recalibrated those interest rate expectations amid a flight into safer assets. Short-term markets have rapidly repriced, with the two-year U.S. Treasury yield falling from more than 5% late last week to below 4% early this week before retracing part of that move.
The good news is that markets appear to be functioning well despite the volatility. Yet this episode may constrain the credit creation process for banks at a time when broader credit growth was already slowing (for more, see our recent blog post, “Bank Failures and the Fed”). That could accelerate the timing of a potential U.S. recession, in our view.
The past week’s events have also put a renewed focus on a keystone of the financial ecosystem: the importance that corporations, individuals, and investors should place on understanding and navigating risks associated with cash management. As with the global financial crisis (GFC) in 2008, recent events are a fresh reminder of those risks.
Since the GFC, the global financial system has undoubtedly become more resilient, thanks to new central banking facilities and regulations such as mandatory capital requirements. Thus under normal conditions, a bank can run a mismatched asset/liability maturity plan and lend its deposits out profitably. It’s when depositors demand their funds back en masse that problems arise. Such is the inherent risk of our “fractional reserve” banking system, where banks need keep only a fraction of their deposits on hand to create loans in excess of the size of those deposits.
For individuals and corporate leaders charged with managing cash and navigating the recent market recalibrations, here are a few points to consider:
Yields on cash investments will remain greatly divergent. Although benchmark rates in the U.S. have risen by more than 400 basis points over the past year, not all cash yields have risen in sympathy with the central bank’s moves higher. Specifically, depository rates have languished well below yields offered in repurchase agreements, T-bills, and short-term strategies. Typically, investors need to take more risk to earn higher yields, but current market conditions – particularly the shape of the U.S. Treasury yield curve – may offer lower-risk opportunities to enhance returns.
Commercial paper and certificates of deposit are not entirely risk-free. The Federal Deposit Insurance Corporation (FDIC) covers up to $250,000 in depository insurance, a backstop that has been further complemented by the Federal Reserve’s weekend announcement of the Bank Term Funding Program. Yet investors who place cash on deposit above prescribed thresholds may be effectively taking a view on the creditworthiness of the underlying financial institution.
Counterparty risk remains a necessary focus. As highlighted by the most recent bank failures, many non-financial companies appear to have been blindsided by the risk that their bank could pose in the event that operational cash (i.e., money used to pay employees or vendors) is frozen or lost in the event of a bank insolvency.
Risks remain in prime money market funds. Despite the regulatory urgency to ensure that the failures of prime money funds in 2008 and the near-failures of 2020 are not revisited, prime money funds remain a significant component of the liquidity management landscape. Given past performance of those credit-oriented funds, investors may want to consider alternatives that acknowledge the credit risk being taken, in terms of liquidity and price, or look to higher-quality government fund strategies.
Recent headlines have been unsettling to individual and institutional investors alike. Though the immediate stress from this latest banking problem may have been alleviated by the quick response by the FDIC and regulators, cash investors may want to take the opportunity to review their current protocols for potential fault lines of weakness.
Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
All investments contain risk and may lose value. Investors should consult their investment professional prior to making an investment decision.
PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2023, PIMCO.
Tell us a little about you to help us personalize the site to your needs.
Select Your Location
Europe, Middle East & Africa
Location not listed? Visit our Global Site.
Terms and Conditions
Please read and acknowledge the following terms and conditions
This website is for the exclusive use of qualified investors as defined by the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”) as well as of quasi-institutional non-qualified investors.
By clicking ‘Accept’, I acknowledge and agree to the terms and conditions above. I undertake to access the information contained in this web site for my personal use and not for commercial use. I confirm that I am a qualified investor as defined by the CISA, respectively a quasi-institutional non-qualified investor, but not a retail investor.
LEGAL INFORMATION FOR INVESTORS OF Switzerland
By accessing this website and the products, services, information, tools and materials that it contains or describes, you acknowledge that you have understood and accept the following terms and conditions of use. Please read these terms and conditions of use carefully before using this website. PIMCO (Schweiz) GmbH, Brandschenkestrasse 41, 8002 Zürich, is responsible for the activities carried out through this website. You may use the materials on this website solely for personal, informational and noncommercial purposes. All rights not expressly granted in these terms and conditions of use are reserved by PIMCO.
This website only includes information on the PIMCO Global Investors Series plc funds and , PIMCO ETFs plc funds which are currently registered with FINMA for offer to non-qualified investors in Switzerland (the “PIMCO Funds”). It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction. The prospectus and key investor information documents (KIIDs), the articles of association as well as the annual and semi-annual reports may be obtained free of charge from the representative in Switzerland. Swiss representative and paying agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The Fund's country of origin is Ireland.
The information contained in this website constitutes an advertisement within the meaning of Article 68 of the Swiss Financial Services Act ("FinSA") for the PIMCO Funds.
INFORMATION ON FINANCIAL INSTRUMENTS
The information contained in this website is not intended as an offer to sell securities or a solicitation to buy PIMCO Funds. The goal is to provide general information on PIMCO Funds that have been authorised for sale in Switzerland and are available for investment and purchase in Switzerland. This site is not directed to individuals or organizations for whom such offer or invitation would be unlawful or prohibited.
PIMCO Europe Ltd, its subsidiaries, affiliates or subsidiaries, including PIMCO (Schweiz) GmbH (hereinafter collectively "PIMCO") assume no responsibility for the financial or other consequences arising from the subscription or purchase of the securities described in this website.
The information presented in this website is based, among other things, on market data at a given time, that is therefore subject to market changes and may change from time to time. Although the information contained in this website is from sources deemed reliable, no guarantee is made as to its accuracy, completeness or reliability. No warranty or representation is made in respect to the information contained in this website including without limit that the information is accurate, complete or timely, except for information concerning PIMCO Funds. PIMCO only warrants that the information contained and opinions expressed in this website are accurate at the date of publication. The price of shares of the PIMCO Funds contained in this website is indicative only and should not be relied upon for dealing purposes.
Users should ensure that they are legally allowed access to this website in the country from which they connect.
You must read the relevant prospectus for the Global Investors Series Plc ("GIS") for all the relevant risk factors pertaining to each sub-fund.
Investment in collective investment in transferable securities involves risks. Performance is shown gross of withholding tax. The source of performance data is PIMCO. Past performance is no guarantee for future results.
INFORMATION ON FINANCIAL SERVICES
The information contained in this website may constitute a purchase or sale of financial instruments within the meaning of Article 3 let. c ch.1 FinSA, triggering the FinSA rules of conduct. PIMCO is however not required to assess the appropriateness and suitability in accordance with FinSA as it does not give investment advice.
No investment advice, tax advice, or legal advice is provided through this website, and you agree that this website will not be used by you for these purposes. No representation is given that shares, products, or services identified on or accessible through, this website are suitable for any particular investor. You acknowledge that your use of this website and any requests for information are unsolicited.
The information on this website does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.
GENERAL RISK FACTORS
Past performance is no guide to or guarantee for future returns. Please note that the price of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. Income receivable may vary from the amount of income projected at the time of making the investment.
For a complete list of risk factors, you should refer to the prospectus of the relevant PIMCO Funds.
For details of how we might collect and use your personal data collected through our website, please see our Privacy Notice.
RECORD OF CALLS
For your safety and ours, conversations with the staff of PIMCO may be recorded. In case of dispute related to these conversations, records of phone calls can be admitted as evidence in court or other legal process to the extent permitted by applicable law.
LINKS TO AND FROM OTHER SITES
PIMCO is not responsible for hypertext links to other sites, in particular as regards the content of these sites, advice and information provided by the authors of these sites for the subscription or redemption of securities, or in respect of subscriptions and redemptions of securities through such third party sites.
PIMCO is not responsible for hypertext links to this site. The creation of such links is prohibited without the prior express permission of PIMCO.
LIMITATION OF LIABILITY
YOU EXPRESSLY UNDERSTAND AND AGREE THAT YOUR USE OF THIS WEBSITE IS AT YOUR SOLE RISK AND THAT THE WEBSITE IS PROVIDED ON AN "AS IS" AND "AS AVAILABLE" BASIS AND WITHOUT WARRANTIES OR REPRESENTATIONS OF ANY KIND EITHER EXPRESSED OR IMPLIED. TO THE FULL EXTENT PERMITTED UNDER APPLICABLE LAW, PIMCO EXPRESSLY DISCLAIMS ALL WARRANTIES OF ANY KIND, WHETHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT.
PIMCO makes no warranty or representation that this website can be accessed at all times. This website may, without notice, be temporarily unavailable or restricted for administrative or other reasons.
You will indemnify PIMCO (including their affiliated or associated companies) and their officers, directors, employees and agents in respect of any third-party claim for any injury, loss, damage or expense occasioned by or arising directly or indirectly from your operation or use of this website or your supply of information to a third party provided in breach of any of your obligations under these terms and conditions of use.
This website is not designed for the transmission of time sensitive instructions or questions. If you transmit any communication through this website to PIMCO directly or through any third-party internet or other service provider, you shall be responsible and liable for any omissions or failures that may be made while transmitting or receiving communications using this website. Furthermore, if you use this website to transmit time sensitive instructions or questions, you will be liable for any loss that may arise, and any such information is transmitted at your own risk.