When we founded this business in 2018 it would have been inconceivable to imagine the world we live in today. We started our journey to redefine money broking when the U.S was leading the charge on raising interest rates and we also experienced the first-rate rise in the U.K in over a decade. We expected more action to come, with markets that year pricing in a further two more hikes in the U.K. This could have been if it were then not for the uncertainties around Brexit and the BoE being cautious with monitoring the pressures of a potential slowdown to the economy and wider global growth. Then the COVID-19 pandemic hit and Central banks around the world pulled out all the stops in a coordinated effort to provide money supply to support their governments and economies.
A large share of the UK’s GDP is generated by the sectors that are hampered the most by the pandemic and subsequent lockdown. For our domestic banks in the U.K, it is the biggest economic shock since the 1980s. As a consequence, businesses have all been forced to implement their own damage control and crisis response plan. Many successfully, and others not so much. The repercussions of this is businesses failures and higher unemployment ultimately feeding through into bank asset quality and higher credit losses. S&P Global Ratings estimates that systemwide domestic credit losses in the U.K will rise to £18.5 billion this year, more than four times the 2019 level.
With vaccines now to be made available across the U.K, we can expect conditions to improve substantially, although this is provided the temporary slowdown does not turn into a protracted recession long after the crisis subsides. Although it is expected that the U.K economy will probably continue to lag behind its pre-crisis peak until H1 2022, because of the U.K exit from the post-Brexit transition period at the end of the year which could further hurt the economy, we have already seen many businesses move into the next phase of their pandemic response.
Businesses and governments will likely turn to the gradual unwinding of extraordinary financial support, revealing the extent of credit losses for banks. The Government will also face the difficult task of balancing near-term risks of premature austerity with a medium-term need to curb debt expansion. For the banks, this is also the first real test of the regulatory overhaul since the financial crisis a decade ago that demanded increases in bank capitalisation and liquidity. The main rating agencies assessments for U.K banks reflect the risks skewed to the downside, with the rise in credit losses and a prolonged period of low, or even negative interest rates squeezing bank profit margins. The rating agencies also responded by lowering the U.K’s sovereign debt rating.
While exceptional monetary and fiscal policy intervention has eased an initial asset quality shock and reinforced U.K banks liquidity and capitalisation which should further protect their ratings, the trajectory of post-pandemic cash balances will depend on management team’s decisions about whether to use added cash to proactively ensure liquidity, pay down debt, or put it toward maximising shareholder value.
Cash and investments held by U.S. nonfinancial corporate issuers rated by S&P Global Ratings rose 30% to a record $2.5 trillion in the first half of 2020, and debt rose 9% to $7.8 trillion, as companies issued a record amount of debt to make it through the pandemic-related shock to their businesses. Record U.S. corporate bond issuances this year $1.6 trillion among investment-grade companies and $400 billion for all but the lowest-rated issuers. While not on the same scale, U.K nonfinancial corporates also went through the same unprecedented recapitalisation of their balance sheets, investing cash in bank deposits and money market funds in order to preserve capital.
With eased near-term liquidity concerns addressed, holding excess cash will mean lower or even negative returns. With interest rates now at an all-time low of 0.10% in the U.K and a range of 0 – 0.25% in the U.S, we are faced with the prospect of record-low interest rates for another prolonged period. The continued erosion of yield is further fuelled by growing belief that the BoE will have to cut rates further, with markets and economists widely speculating on whether or not the BoE should cut rates to zero by Q1 2021.
The overall impacts of all of this should not be overlooked. For one, the downgrade of credit ratings on the main deposit-taking banks in the U.K has created an open and level playing field with the rest of the deposit-taking banks in the market. With the perceived credit risk for many banks now the same, the question for treasury and finance teams turns to yield and finding the optimum liquidity the deposit or investment provides.
Every business has a different approach to cash management. Many use standardised methodologies and policies, others not so much. We bring to the attention of our clients a diverse range of bank deposits that can achieve better returns in line with their counterparty criteria and what they choose to look for in a bank. By playing a key role in negotiating rates we can ensure that the rate achieved is representative of the liquidity benefit the bank receives.
For our clients during the pandemic, this has been at a time when they have been forced to reassess their cash management strategies and safety of their cash reserves by managing the fine balance and trade-off with the pillars of cash management (diversification, liquidity and yield) in order to preserve capital. By using the correct deposit products with carefully considered counterparties, any business will be able to achieve better returns while not compromising on the liquidity or credit quality of the counterparty they are placing funds with. As a minimum, any yield achieved helps lower the real cost of holding excess cash in inflationary terms.
About FXD Capital
FXD Capital is a brokerage that specialises in cash deposits and money markets. Chris Huddleston and Bobby Jackson founded the firm in 2018, having spent almost a decade working together at one of the UK’s leading specialist banks. Our mission is to improve the efficiencies of our clients’ cash balances from reducing risk to enhancing liquidity and maximising yield by offering term deposits, notice accounts and money market funds from a diverse range of banks and asset managers.