The hidden cost of doing nothing
For two years, cash did something it had not done in a generation: it paid. A euro-denominated deposit could earn comfortably above 3%, and for many private clients that was sufficient reason to let balances accumulate. Cash felt not merely safe but productive, and the question of where else capital might sit lost its urgency. That period is closing. With the deposit facility rate having been cut in steps from its 2023 peak and now sitting at 2%, the headline yield on a retail or private-bank deposit is following it down, and the gap between what cash pays and what it might pay elsewhere is widening again.
The instinct to treat cash as a parking space, somewhere capital rests at no cost while a decision is deferred, was always an illusion; the rate environment simply disguised it. A parking space is free. A position is not. Holding cash is a position with a yield, a duration of effectively zero, and an opportunity cost measured against every other asset a client could own. When that position earns 3.75%, the cost of holding it is modest. When it earns 1% net of a falling deposit rate and the bank's margin, against medium-term euro investment-grade credit yielding north of 3%, the cost becomes material and compounds quietly.
Consider the arithmetic on a EUR 2m balance left idle rather than deployed at a 2 percentage-point yield pickup. That is EUR 40,000 a year in forgone income, before any consideration of capital appreciation or the reinvestment of coupons. Over a five-year horizon, with compounding, the foregone amount approaches a quarter of a million euros. None of this appears on a statement as a loss, which is precisely why it persists. The most expensive decisions a balance sheet makes are often the ones never consciously taken.
What real inflation does to nominal comfort
Nominal stability is the quality clients most prize in cash, and it is also the one most likely to mislead. A deposit balance does not fall in number, so it feels preserved. But preservation is a real concept, not a nominal one, and euro-area inflation, having receded from its peak, is settling around the central bank's 2% objective rather than disappearing. A cash balance earning 1% net while prices rise 2% is losing roughly 1% of its purchasing power each year with complete reliability.
The effect is slow enough to be ignored and persistent enough to matter. A million euros held in real terms at minus 1% per annum is worth approximately EUR 951,000 in today's money after five years and EUR 904,000 after ten. The client has not spent a cent, taken no risk, and made no error, yet a tenth of the family's purchasing power has dissolved. For multi-generational capital, this is the central hazard of excess liquidity: it does not fail dramatically, it erodes invisibly, and it does so at exactly the moment the holder feels most prudent.
We make this point not to argue that cash should be minimised at all costs. Negative real carry is an acceptable price for genuine liquidity that will be drawn upon. It is an unacceptable price for liquidity that exists only because no alternative was chosen. The discipline lies in distinguishing the two.
How much liquidity a client actually needs
Liquidity requirements are knowable, and the exercise of sizing them is the foundation of the entire question. We find it useful to separate a client's cash into three buckets, each with a clear purpose and a defined limit. The first is the operating buffer: the working capital that funds living expenses, tax, and the ordinary running of a household or family office, typically six to twelve months of outgoings held in immediately accessible form. For most private clients this is a smaller figure than instinct suggests.
The second is the commitment reserve: capital earmarked against known, dated obligations within the next twelve to twenty-four months, a property completion, a capital call on a private-markets fund, a tax assessment, a planned gift. This money has a job and a deadline, and it should be invested to mature in time for that deadline rather than left at call. The third is the contingency or opportunity reserve, the genuinely discretionary cushion a client wishes to hold against the unforeseen or to deploy when markets dislocate. This is the bucket where judgement, and temperament, properly enters.
Once these three are sized honestly, the residual is usually large. A client who reflexively holds 30% of liquid wealth in cash frequently discovers, on this analysis, that a true requirement is closer to 8% to 12%. The remaining 18% to 22% is not liquidity at all; it is undeployed capital wearing liquidity's clothing. Identifying it is the single most valuable output of the conversation, because it converts an unexamined default into a deliberate allocation decision.
Where the rest should sit
The space between a current account and a long-duration portfolio is broad and well-furnished, and the appropriate instrument depends almost entirely on horizon. For the contingency reserve, where access matters but a few days' notice is tolerable, euro money market funds offer a yield close to the prevailing policy rate, daily liquidity, and diversification across high-grade short-term paper. They are the natural successor to the call deposit and typically out-yield it, because they capture wholesale rates without the retail margin a bank necessarily retains.
For capital with a six- to twenty-four-month horizon, short-dated government bonds and high-grade corporate credit become compelling. Two-year German and French paper, or a diversified holding of one- to three-year investment-grade credit, locks in a known yield to maturity, currently in the region of 2.5% to 3.5% depending on issuer and tenor, with limited interest-rate sensitivity. A client who buys a two-year bond at 3% has fixed that return regardless of where deposit rates travel; a client who stays in cash has accepted whatever the rate becomes, which in an easing cycle is lower.
For the portion that can tolerate a longer horizon, a modest bond ladder, with maturities spread across two, three, four, and five years, addresses the reinvestment problem directly. As each rung matures it is reinvested at the then-prevailing rate, smoothing the effect of rate changes and providing a regular, predictable flow of returning capital. The ladder is unglamorous and precisely for that reason well suited to capital whose first duty is to remain intact while working harder than a deposit.
The counter-argument, taken seriously
It would be dishonest to present this case without its rebuttal, because the rebuttal contains real merit. Cash buys optionality, and optionality has value that no yield comparison captures. A client holding meaningful liquidity in a market dislocation can act decisively while others are forced sellers; the dry powder that looked expensive in calm conditions becomes the most valuable asset on the balance sheet in disorderly ones. We would not counsel any client to extinguish that capacity entirely, and our framework deliberately preserves an opportunity reserve for exactly this reason.
There is also the matter of temperament, which a research note should not pretend away. For some clients, the psychological return on a large cash balance, the ability to sleep without watching markets, is worth more than the financial return it forgoes. That is a legitimate preference, not a failure of discipline. The objection we raise is narrower: optionality and peace of mind are goods worth paying for, but they should be bought knowingly and sized deliberately, not accumulated by inertia. A client who chooses to hold 25% in cash with full awareness of its cost has made a defensible decision. A client who holds it because the question was never asked has not.
Finally, the timing objection: rates may fall further, in which case deploying now and locking in today's yields is the right move, or they may stabilise, in which case patience costs little. The asymmetry favours action. Short-dated instruments carry limited downside if the view proves early, while continued cash holding guarantees participation in every further cut. One does not need a strong rate forecast to prefer a fixed 3% to a floating rate already in decline.
What this means for clients
First, treat the cash question as a decision rather than a residual. We would encourage every client to size the three liquidity buckets explicitly with their adviser, an operating buffer, a commitment reserve, and an opportunity reserve, and to recognise that the balance above their sum is an investment allocation that has simply not yet been made. Naming it is most of the work.
Second, match instrument to horizon. Money market funds for the contingency cushion, short-dated government and high-grade corporate bonds for dated commitments, and a short ladder for capital that can stay deployed; each captures more of the available yield than a deposit while respecting the time at which the money is actually needed. The aim is not to take more risk but to stop being paid less for the same risk.
Third, act before the easing cycle does it for you. Locking in today's yields on short-dated paper fixes a known return; remaining in cash accepts a rate that is, on present trajectory, more likely to fall than rise. For a client carrying material excess liquidity, the cost of waiting a further year is concrete and quantifiable, and rarely justified by the optionality it preserves. Cash deserves a place in every private-bank portfolio. It does not deserve a place it has not earned.
This note is house research and reflects the views of the Fixed Income desk at the time of writing. It is not investment advice or an offer.
