Risk Management is Not the Only Reason to Diversify Cash Accounts

Published: April 05, 2023

Current banking turmoil suggests now may be a good time for treasurers to reassess their approach to cash deposits. But diversification has many strands.

There’s nothing like a bank failure to remind everyone that diversification is a core principle of ‘Investing 101’. The recent collapse of Silicon Valley Bank and New York’s Signature Bank predictably put managing cash risk – previously a low priority for many – at the top of the corporate finance to-do list.

A Gartner poll of more than 250 CFOs and senior finance leaders conducted on 13 March, right after those high-profile meltdowns, found that 85% were concerned about the impact of bank failures on their current operations and 28% were planning to diversify their deposits across more banks.

What previously might have felt like too much work to reduce an already tiny chance of losing money now feels like a priority. But diversification is not just about mitigating financial system risks. It’s also about guarding against reputational risks, security breaches, and catastrophic events. There can also be an ESG benefit that’s far less recognised: cleaning and reorganising your cash closet is an opportunity to improve your company’s social impact.

Assessing the options

Corporate treasurers can diversify cash across many different instruments, such as treasury bills, MMFs, and agency notes (some of which might introduce market, credit and liquidity risk). In the US, they can use the Certificate of Deposit Account Registry Service (CDARS) to make insured CD investments across multiple banks. And they can diversify cash holdings across depository institutions to maximise US Federal Deposit Insurance Corporation (FDIC) insurance by leveraging a sweep account with an existing bank partner or using a specialised vendor.

All those solutions are valid options to manage risk, return and insure excess deposits. But if you’re going through the exercise of diversifying cash, why not consider deploying some cash holdings into institutions that will use the capital to close the wealth gap, build resilient communities, fight the climate crisis and fund affordable housing?

The impact opportunity

Impact Cash deployments on CNote’s platform, for example, get spread across multiple FDIC- and NCUA (National Credit Union Administration)-insured community finance institutions, including banks, low-income designated credit unions and minority depository institutions. Investment is aimed at growing the deposit base at these institutions to enable community development financial institutions (CDFIs), for example, to fund women- and minority-led small businesses, affordable housing, and economic development. Low-income designated (LID) credit unions serve communities where most people have household incomes well below the national median. And minority depository institutions (MDIs) can be financial lifelines for communities of colour.

Optimising diversification

In the scramble to make sure cash holdings are secure, many are looking to ‘too big to fail’ banks and erroneously assuming that community finance institutions are a riskier option. In fact, the US Treasury Department’s CDFI Fund commissioned analyses of CDFI loan funds, banks, and credit unions compared with conventional financial institutions and found that they pose no more risk of financial failure than their traditional counterparts. For treasurers concerned that smaller institutions are more vulnerable to banking industry turmoil, note that credit unions’ deposits are 91% insured (per December 2022 reports to the NCUA), making them highly unlikely to experience a bank run.

Community finance institutions are more properly viewed as an additional asset class, one that can be fully insured when treasury teams use a platform that spreads deposits out nationally. Shifting some deposits their way enhances diversification – and unlike just about any other cash management option, provides measurable impact that contributes to ESG goals. With treasury teams taking a fresh look at safeguards for their cash holdings, now is the time to optimise for both financial security and social performance.

CNote deploys deposits and investments to impact-driven community finance institutions through its technology platform.