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The Evolution and Challenges of Institutional Cash Pools: A Focus on Safety and Liquidity

Institutional Cash Pools (ICPs) represent large, centrally managed short-term cash balances for global non-financial corporations and institutional investors, ranging from $1 billion to over $100 billion. Their importance surged from $100 billion in 1990 to over $2.2 trillion at their peak in 2007. ICPs prioritize safety, liquidity, and yield, yet face challenges including limited banks to hedge risks and a reliance on the shadow banking system for safe assets. Proposed solutions include increasing Treasury bill issuance and expanding access to non-bank lenders to mitigate risks and enhance stability.

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The Evolution and Challenges of Institutional Cash Pools: A Focus on Safety and Liquidity

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  1. Institutional Cash Pools (ICPs) • Large, centrally managed short-term cash balances of global non-financial corporations and institutional investors such as asset managers, securities lenders, and pension funds. • Sizes range from $1 billion to $100+ billion.

  2. Increasing Importanceof Institutional Cash Pools • Rose from $100 billion in 1990 to over $2.2 trillion at their peak in 2007.

  3. Institutional Cash PoolsObjectives In order of priority: • Safety of principal • Liquidity • Yield

  4. Institutional Cash PoolsProblems • Not enough banks to spread across (in insured deposits). • Not enough short-term government guaranteed instruments. Result: Rise of “shadow banking system” to supply needed safe assets! (i.e., not an “end around” of capital requirements)

  5. Institutional Cash PoolsProblems • Large pools of cash makes shadow banking system inherently prone to runs. • Solutions: • Issue more Treasury bills • Expand Lender of Last Resort access to non-banks Both done during financial crisis!

  6. New Perspective on Dodd Frank • Temporary provision of unlimited deposit insurance on non-interest bearing transaction accounts. • Repeal of Regulation Q prohibition on paying interest on transaction accounts. • Increase in deposit insurance cap to $250,000 From June 2008 to June 2011, deposits went from 16% of ICPs to 33%

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