Merrill Lynch Mercury Asset Management reports that UK FTSE 350 companies, excluding banks, are sitting on £65 billion ($108 billion) of cash, most of it placed on deposit in the interbank market. It further estimates that European corporations, insurance companies and pension funds are together rolling over some $561 billion of liquidity, mainly through interbank deposits. Corporates account for some 70% of that liquidity. These companies haggle with their banks to cut liability costs by a few basis points. They should ask themselves whether they are also earning a competitive return on their cash assets.
Just $10 billion of that European liquidity - less than 2% of the total - sits in institutional liquidity funds. While this remains a small sector of the European short-term finance markets, it is a well-established alternative to bank deposits in the US. There, institutional liquidity stands at $2.7 trillion, of which $1.3 trillion (48%) is invested in money-market funds. Some European corporates with very large core cash balances may have these managed through specialist accounts, but most are rolling over deposits, earning low returns and, arguably, taking undue risk by concentrating deposits in just a few banks.
Merrill Lynch Mercury along with several other asset managers - including Goldman Sachs Asset Management, Chase Asset Management, State Street and some European banks - have recently launched or are launching institutional liquidity funds.