The impact of the soaring costs on businesses this year is substantial as central banks continue to step up the pace of rate tightening. While market expectations have been quite volatile in 2022, further rate hikes are expected for the remainder of the year and into 2023. That said, central banks do see inflation falling to their target levels in 2024 and so, if their economic projections are in anyway close to what they expect, then rates could go much lower again by then.

The pandemic caused many businesses to strengthen their cash reserves as it was important for treasurers, finance directors, and CFOs to ensure they had sufficient cash and liquidity to navigate the protracted uncertainties we faced. While the pandemic feels like it is well and truly behind us now, the war in Ukraine has intensified the financial and economic stress we are faced with today.

Corporates and Institutions are turning to FXD Capital to review and put in place a cash management strategy that is aligned to their treasury policy and risk parameters in search of perfecting the four pillars of cash management: liquidity, risk, capital efficiency, yield.

Identifying & Measure Risks

Maximising return is important, but the perception is that banks that offer higher returns usually pay a premium because of the increased level of risk attached. This should not be overlooked, least of all any returns help to lower the real cost of holding cash in inflationary terms.

Whether your focus is on maximising returns or enhancing liquidity, or a balance of both, it is important you are comfortable with your counterparty risk. In June 2022 the BoE published the findings from its first assessment of the resolvability of the eight major UK banks, concluding that these banks are no longer ‘too big to fail’. This means that shareholders and depositors, not taxpayers, will be first in line to bear the costs if a bank failed today.

Measuring a banks’ financial strength as well as resilience and capacity to absorb losses after an economic shock has never been so important. That’s why FXD Capital are on hand to guide our clients through this complexity. Whether that be externally assigned and widely recognised credit ratings from the major rating agencies, or regularly updated FXD Capital Counterparty Due-Diligence Assessments, we provide access to information to assist understanding and make it straightforward to compare banks against one another to actively measure the financial strength and risk of the banks you are leaving your cash with.

Identify and Implement Solutions. Monitor Results…

With deposit rates changing on a weekly or monthly basis, actively monitoring the performance of your deposit is a key challenge that should not be overlooked. It’s important to consider the interest rate outlook as well as the type of deposit product, to ensure that the central bank rate hikes translate into a representative increase in your deposit and that the rate received is representative of the liquidity benefit and funding that the bank receives. It’s also important to consider all relevant counterparties, not just those commonly considered names to ensure your rates aren’t supressed, and that you have access to the full range of standard deposit products and bespoke solutions available in the market. Depending on the liquidity and cash requirements of your business, you can then decide on implementing your strategy by utilising the correct deposit products.

To learn more about how FXD Capital could benefit your business, please get in touch with a Portfolio Manager on or call +44(0) 20 3036 0520.