According to Andrew Hilton, Director, Centre for the Study of Financial Innovation there are a few factors that might be prompting increased cash holdings, including the increasing importance of tech-based firms.
According to Andrew Hilton, Director, Centre for the Study of Financial Innovation there are a few factors that might be prompting increased cash holdings, including the increasing importance of tech-based firms.
Speaking at the ACT Cash Management Conference 2015 on Wednesday, Hilton said that based on data from the middle of last year, US corporations are holding more cash than ever and figures from an ACT study published in September 2014 shows that UK private non-financial corporates are holding around £500bn in cash.
Hilton said that an increase in cash can have a negative impact on a firm because holding a lot of cash on the balance sheet can make the balance sheet less efficient and can also leave the company more open to predators.
Hilton believes that alongside factors such as increased political and economic uncertainty, the change of structure in the US and UK in favour of higher research and development activities, more sophisticated supply chains and the importance of maintaining credit rating, the emergence of tech-based firms such as Apple are also prompting an increase in cash holdings.
Since the 2007-2008 financial crisis businesses have been holding on to significantly more cash which has become a source of contention for many thanks to ever-expanding cash ‘hoards’. But questions have been raised about what are corporations are going to do with this money and when shareholders are going to see an increase in dividends.
According to Hilton, the cash ‘hoards’ are going to continue to be effected by economic policy and interest rates, as well as political and economic uncertainty. Economic growth is predicted to fall in the UK this year and rise in the US and interest rate security will still remain an issue.
Hilton said the UK election will have an effect especially if the votes results in a hung parliament which he believes is almost certain to happen. Other political influences mentioned were the Russia and Ukraine crisis and the impact if Greece decides to leave the EU.
Post-crisis banks have taken on new responsibilities such as an increase in regulatory compliance and face uncertainty surrounding what regulators are going to ask for next. This has affected relationships between banks and treasurers who believe that they are not being best served by banks. “Banks have become unreliable partners to treasurers because of the re-regulation process put in place since the crisis makes them unable to properly serve their clients,” said Hilton.
Hilton said he is certain that banks will face higher capital requirements, higher fines and penalties and more intrusive micro and macro-prudential oversight over the next few years, which both banks and treasurers are going to have to accept.