Cash & Liquidity ManagementCash ManagementNetting/PoolingLiquidity Management in Europe and the US

Liquidity Management in Europe and the US

Liquidity management is certainly a hot topic in the world of treasury, both in the US and in Europe. The economic, political and business environments have influenced both liquidity portfolio characteristics and management processes. Very low interest rates, followed by a continuous period of rising rates, an increased focus on controls and the need for more transparent financial reporting have affected liquidity management in both Europe and the US. However, each area also faces unique factors that account for differences in how companies manage liquidity in Europe compared to the US.

Overall Liquidity Levels

Total liquidity balances remain at historic highs in both Europe and the US. Treasury Strategies estimates that total corporate liquidity in Western Europe is approximately €4 trillion, while in the US it is US$5 trillion. This accumulation of cash is mostly attributable to the interest rate environment over the past three years. Interest rates were extremely low for longer than expected, so investors became uncertain about future rate movements. In the wake of this uncertainty, companies built up larger-than-normal cash balances.

Additionally, regulatory changes in Europe and the US have forced companies to strengthen their internal controls and financial reporting. This new regulatory environment may have caused some corporate investors to be more cautious with their cash balances. At the individual company level, liquidity portfolio sizes across Europe and the US are comparable.

Liquidity Portfolio Characteristics

As expected, the majority of companies’ liquidity is held in investments with maturities under 30 days (with the majority of it held overnight). However, European companies hold even more of their liquidity in very short-term investments (73%) than US companies do (57%). Additionally, US companies maintain a greater portion of their liquidity portfolio in investment with maturity greater than one year. However, with the current flat yield curve this is likely to change.

The breakdown of corporate liquidity by investment instrument type looks very different in Europe from the US. European companies hold 50% of their liquidity in bank deposits (current accounts, call accounts, investment sweeps, fixed deposits), compared with 10% in the US (demand deposit accounts (DDA), money market deposit accounts (MMDA), investment sweeps). In Europe, banks can pay interest on commercial demand deposits, while in the US they cannot. This clearly drives behavior, as US companies have an incentive to minimize their bank deposit levels.

The large percentage of liquidity in Europe held in bank deposits then results in smaller percentages held in the instruments that represent the majority of liquidity in the US (notes/bonds and money market instruments). It is interesting to note, though, that mutual funds (both money market and fixed income/bond funds) represent relatively equal percentages of liquidity in Europe and the US.

Mutual funds are relatively newer in Europe than in the US, but represent nearly equal percentages of liquidity at the aggregate level.

Portfolio Instrument Breakdown: US vs Europe

Challenges in Managing Liquidity

Cash forecasting is a significant challenge that companies currently face. Nearly 40% of companies in Europe and the US report that the lack of an accurate cash forecast is very challenging in maximizing liquidity management. European companies find forecasting especially challenging as nearly 30% of companies reported that forecasting is one of their top overall treasury issues.

The biggest reason for companies experiencing frustration with their cash forecasts is the inability to access timely and accurate information that feeds the forecast. In addition to forecasting, companies in Europe and the US have found maximizing short-term investment returns especially challenging in the lower interest rate environment. European companies face the additional challenge of managing and consolidating cash across multiple countries within the region. While current initiatives are facilitating regional cash concentration, companies are still challenged by multiple banking and payment systems.

Percentage of Companies that Forecast: US vs Europe

Cash Forecasting: Further Exploration

The majority of companies in both Europe and the US create cash forecasts to predict future cash needs. However, a higher percentage of companies in Europe forecast cash than in the US.

Although the majority of companies create forecasts, only half of European and US companies utilize their cash forecasts as the primary input in making investment maturity decisions. This represents an opportunity for companies to improve the use of their cash forecasts; in fact, in the US, companies that use their forecasts reported higher yields than those that do not. However, companies did report a need for more accurate cash forecasts that may influence their propensity to fully utilize their forecasts.

Cash forecasting is also a function that companies have been unable to automate to a great extent. Over 90% of companies in both Europe and the US utilize spreadsheets to create their cash forecasts. Companies have turned to spreadsheets for cash forecasting for three main reasons:

  1. They believe their cash forecasts to be too specialized to utilize an automated tool.
  2. They believe that no automated solutions can fully meet their needs, especially in performing more advanced statistical calculations (regressions, etc.).
  3. They cannot automate the upload of information input into the cash forecast, which typically comes from multiple sources.
Primary Input into Investment Maturity Decisions: US vs Europe

Liquidity Portfolio Performance Benchmarks

Around 40-50% of companies within both Europe and the US do not benchmark liquidity portfolio performance (investment returns). Companies may view their short-term portfolio as their ‘safe’ money – the funds required to run the company – and are less concerned with investment return on this portion of their overall assets. For other companies, liquidity may represent a very small portion of their total assets, and again, are not as concerned with investment return.

For those companies that do benchmark liquidity portfolio performance, most are managing the benchmarking internally. This process can be as simple as comparing returns to a money market index, or more complex. Some companies utilize a third party to benchmark performance, generally their investment providers or advisors. In the US, these companies reported higher yields than those companies benchmarking internally. While utilizing a third party to benchmark performance may not directly yield higher returns (companies that hire a third party to benchmark are generally more focused on returns), a third party will generally bring a rigor to the benchmarking process.

Note: All statistics quoted in this article are from Treasury Strategies’ 2005 European Corporate Treasury and Liquidity Research Program, in which the company interviewed treasury professionals from 505 companies with revenues over €200m. The US statistics are from Treasury Strategies’ 2005 US Corporate Liquidity Research Program, in which we interviewed treasury professionals from 663 companies with revenues over US$50m.

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