Interest Rate Drama is Distracting Companies and Costing Them Money and Control

Author: Brian Weakliam, Founder & CEO

Over the past few days there has been much media over-reaction to the failure of the US Federal Reserve to reduce interest rates, much from vested interests. This creates confusion and can cloud judgements.

Reducing interest rates is always going to be popular with investors as it naturally supports the migration of investment away from banks and money market funds into other assets like equities and property. It has a double impact in that it makes borrowing cheaper, further inflating the value of those assets.

Companies and other organizations should not let themselves get too distracted. It is clear that most organizations that have operating cash in the bank did not benefit greatly from the interest rate rises and this remains the case. This is mainly due to the legacy nature of banking systems that were designed for banks rather than their customers.

Businesses need to look closely at the three core elements of their bank balances: price, risk and liquidity.

Price

The amount of interest the bank is prepared to pay to have your money. If they can earn 5% on your money by placing it risk free with a central bank then what interest rate should they be paying to you?

Regulatory reports for 2024 shows that on average organizations achieve poor interest returns from their bank account funds despite the rise in market rates. This can be addressed by reviewing the structure and configuration of the bank accounts. 

Risk

The main risk you take is by lending your money to a particular bank (counterparty risk). We have ratings agencies and other sources to evaluate the amount of risk your organization is taking. Vast amounts of market intelligence can help to better inform Finance leaders.

Liquidity risk is essentially the risk of running out of available cash.

The price should factor in the level of risk just like any commercial loan.

Liquidity

If you needed your money now, how soon could you get it? As we have seen in recent times, assuming your money can be claimed ‘on demand’ needs to be weighed up. In an emergency can it be 100% guaranteed you will have access to your organizations bank funds?

In theory, the higher the liquidity (like current accounts and ‘demand deposits’) the lower the risk. On the flip side, the lower the liquidity (term/notice deposits), the higher the risk and the higher the price.

You should have metrics that allow you to see if these three elements are proportionally balanced based on cashflow analysis and the underlying business.

Treasury/Investment Policy

Most organizations have some form of treasury policy or ‘rules’ about how and where they place their cash. Many treasury policies are outdated and do not factor the modern banking environment where a bank run could happen in minutes, even where there is no perceived risk.

Click here to read the Bankhawk whitepaper on Treasury Policy

Making sure your organization is well equipped to address all of these challenges will, at a minimum  increase its bottom line but it is also required to safeguard its future.

The Author

Brian Weakliam is an international banking expert and has guided many large organizations to ensure their banking arrangements are optimized. He is the founder of Bankhawk, a pioneering firm that provides advice to businesses across many sectors.