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>My first suggestion would be as T-Bills. [...], and I'm still not sure why it was not standard practice. Corporations have always split their cash into cash
by jasode 4y ago
>My first suggestion would be as T-Bills. [...], and I'm still not sure why it was not standard practice.
Corporations have always split their cash into cash and "almost-cash-equivalent" liquid assets (like Treasury Bills). E.g. one can read any random 10-k corporate filing and there will be a line item for short term assets like "T-bills" because companies like to earn interest on their excess cash. The corporate treasurer is responsible for managing that mix.
But a company still needs working cash in the bank account for payroll and to pay vendors. The smaller startups may have not have enough excess cash to bother with splitting some of it into T-bills.
- tome 4y ago> a company still needs working cash in the bank account for payroll and to pay vendors I also don't understand this. Why can't the working cash be a loan from the bank secured on the T-Bills? Then the depositor bears essentially no risk because they have no net balance with the bank. Essentially, why can't companies' working cash be overdraft? That way it's the bank that bears the risk rather than the companies. That's the whole point of the bank! I guess one downside is that the bank will apply higher funding charges for that kind of arrangement. Well, the depositors should suck it up. You have to pay a price for resilience. I guess there are other fine points of corporate finance that I have yet to grasp, but I'm learning a lot from the comments on HN. Thanks for your reply.
- piva00 4y agoIf everyone gets cash from loans, who'll be the depositors putting cash in the bank to be loaned?
- JumpCrisscross 4y ago> who'll be the depositors putting cash in the bank to be loaned Loans create deposits, not the other way.
- kgwgk 4y agoIncreasing the need for reserves, which banks acquire usually via deposits.
- tome 4y agoBut not increasing it as fast as the loans increase.
- tome 4y agoBut not increasing it as fast as the loans increase, hence, fractional reserve.
- kgwgk 4y agoIf the fraction was to stay constant deposits would increase as fast as loans. In fact the problem of the US banking system in the last years has been that deposits have been increasing much faster than loans.
- tome 4y ago> If the fraction was to stay constant deposits would increase as fast as loans. In relative terms yes, in absolute terms, they'd be lower. > the problem of the US banking system in the last years has been that deposits have been increasing much faster than loans Yes, it seems to be. "Too much money chasing too few returns", as they say.
- kgwgk 4y ago> In relative terms yes, in absolute terms, they'd be lower. Not really. The Loan-to-Deposit ratio is usually lower than one so if both double that means that deposits grow more than loans in absolute terms.
- tome 4y agoYeah, that's my misuse of the term "deposit" where I meant something like "total reserve amount".
- tome 4y agoLoans are not made from deposits even now. But you may well be right that there are operational details that make my idea impossible, I don't know. HN seems to have some people with understanding of corporate finance, so hopefully they'll be able to educate me.
- kgwgk 4y ago> Loans are not made from deposits even now. But banks have more deposits than loans even now. Because they need to get money from somewhere.
- tome 4y agoNo they don't, because the banking system is fractional reserve. Pretty much every bank has more outstanding loans that deposits (even if part of those loans is to the government).
- kgwgk 4y agoCan you point to a bank with more loans than deposits in its balance sheet? (Honest question, I'm curious.) As far as I can see the banking system in aggregate has more deposits than loans: https://www.federalreserve.gov/releases/h8/current/default.htm https://www.federalreserve.gov/releases/h8/current/default.h...
- tome 4y agoThanks, I think there's something faulty in my understanding of terminology. By "deposits" I was understanding "deposits backed by holdings at the central bank". The original question I was trying to answer was "If everyone gets cash from loans, who'll be the depositors putting cash in the bank to be loaned?". I just don't think that question is well-posed. A bank creating a loan requires new cash deposits of only R x loan_amount, where R is the reserve requirement. For making payroll this ought to be almost nothing.
- 4y ago
- ckdarby 4y agoUneducated in this space, but why don't we see more T-Bill ownership transfer? I owe vendor $100k. I transfer $100k of T-bills. They are paid cash equivalent, no? The obvious thing that comes to mind is I am guessing there is some lockup of those t-bills maturing? Wouldn't this make sense for the Fed (Or some government entity) to be the broker+last resort to allow conversion of t-bill to someone else at a cost of breaking the term? Even though the t-bill itself would still exist until maturity on the Fed's side and now company A is able to always guarantee payment transfer.
- NordSteve 4y agoT-bills are super liquid, have a low bid-ask spread, and are cheap to turn into cash, so there's no real need for a barter system in t-bills.