Notional cash pooling enables businesses to manage the group's finances from a single account, giving corporate treasurers a useful, unified view of accounts that may be dispersed among numerous affiliated organizations, in different countries, and using different currencies.
The United States forbids it. However, it is well-known in Europe and Asia as a useful strategy for managing the balance sheets of large multinational corporations on a group level. It enables the businesses to compare their assets against their obligations, including those of their affiliates.
Basel III has also mandated that banks clearly disclose all of their clients' assets and liabilities in order to ensure the improved openness necessary to safeguard the financial system.
Physical cash pooling would not be substantially affected by this. However, notional cash pooling, in which there has been no actual transfer of money across currencies, imposes an additional burden on businesses by requiring them to disclose their liabilities in a far greater amount.
The liabilities associated with each currency position would have to be disclosed and have an equity capital distribution set against them, typically ranging from 11% to 13%, where currencies are managed separately but as a subset of a single master account.
Although they are relatively few, banks that offer notional cash pooling to their customers most certainly have an impact on both leverage and liquidity coverage ratios. Although there aren't many businesses employing this service, those who do are among the banks' most important customers.
The balance sheet of a bank could be significantly impacted by notional cash pooling for certain clients. Several times, the effect on leverage and the LCR would make it less compelling to serve various clients. It would imply that some banks might leave the industry.
However, the regulation does not alter the necessity for businesses to efficiently manage their balance sheets.
For clients with large firms, where the treasurer would like to have a comprehensive evaluation of group finances, hypothetical cash pooling would still be interesting. It guarantees that the company won't have to manage its FX positions in the market, which could be expensive in and of itself.
Additionally, it does away with the need for inter-company loans and gives the group treasurer considerably greater control over the input and outflow of funds inside the organization.
Additionally, it provides a lot of operational freedom. Cash pooling enables businesses to operate in new jurisdictions without having to establish connections with local institutions to provide local cash.
Effectiveness is the key concept of notional cash pooling: instead of requiring multiple treasurers worldwide for a large and diverse group, it enables the function to be effectively concentrated in one location and run by a single treasurer.
Although some banks might leave the industry because it would be difficult to turn a profit, the product would still be in demand. Businesses need to be prepared for interruptions. Even if their initial conversations with banks do not go as planned, they shouldn't give up.
""The structure of the product implies that although a client's business can have a significantly negative impact on one bank's balance sheet, it might have a much smaller impact, or even a positive impact, for another bank,"" says Arnaud Pichon, international desk supervisor at Société Générale.
A bank might, for instance, decline a client who has the most of their cash in USD but little in GBP on their balance sheet yet accept a client who has the majority of their cash in GBP. A bank with reverse exposures might adopt the contrary stance. To find the bank with the greatest strategy, treasurers must interact with as many banks as they can.
Cash management has historically been a complicated industry, and businesses have a tendency to stick with their service providers if they are happy with the product or service being provided. Since switching suppliers is a lot of work, many businesses would undoubtedly prefer to continue their current ties.
Despite this, businesses need to evaluate their current plans over the next two years to see if they are still sustainable. Even though their firm is now appealing to their bank, any change in circumstances, like a sizable purchase, could significantly alter the viability of that partnership.
Experts claim that companies using notional cash pooling currently need a backup strategy. They need to find out from their banks whether the service will be cancelled or re-priced because frequently, just one of the two will happen.
Because of the potential for client disruption, banks have been known to leave the industry in the past. Companies shouldn't wait to learn that the terms of service need to change before acting. Instead, they want to locate a service provider that is prepared to deliver the good at the most affordable cost.
Future predictions call for a rise in notional pooling usage. Businesses would be able to manage their money more effectively since they would have a greater understanding of their financial situation.""" - https://www.affordablecebu.com/
