Without waiting for the final terms of the new prudential treatment of notional cash pooling, several sponsor bank institutions have decided to position for clear withdrawal of their pooling services, says Solenn Le Lay, associate director at Redbridge.
Without waiting for the final terms of the new prudential treatment of notional cash pooling, several sponsor bank institutions have decided to position for clear withdrawal of their pooling services. Of the various group-level cash pooling solutions, notional cash pooling has always been ranked highly due to the technical aspects of this service, which only the largest banks have mastered. Most major international groups in Europe use multi-currency notional cash pooling to optimize their cash management. By relying not on transfers, but on netting of the different balances in the targeted accounts, this solution reduces foreign exchange hedging transactions and offsets the debit interest in a borrowing currency by credit interest from another cash-rich currency.
The technique of consolidating interest levels, which is another term for notional cash pooling, is threatened by the implementation of the new Basel III prudential banking sector rules. In short, the new regulation requires banks to mobilize sufficient equity to cover any debit positions in each currency and now prohibits them from offsetting positions between different currencies over long periods of time. Thus, Basel III disrupts the economic equilibrium of the structure’s operation.
The Basel Committee responsible for banking oversight has still yet to decide, after having submitted new rules for comments by banks between April and July 2016. Even without waiting for publication of the final terms of the prudential and accounting treatments applied to notional cash pooling, several months ago, a number of sponsor banking institutions acknowledged that changes in regulation are causing them to withdraw from their service offer. Banks now reserve this service only for selected clients. In contrast, other banking establishments have decided to continue working with corporates, while at the same time requiring fairly stringent counterparties for the treasury unit.
Some banks are requesting a zeroing out of the main accounts for each currency each quarter, on a fixed or variable date, sometimes subject to penalties. Other institutions have set limits on cumulative daily debit positions. Still others require a pledge on the total of credit positions in addition to cross guarantees or guarantees from the parent company.
US banking institutions offering notional cash pooling solutions based in London or outside Europe are not subject to these Basel III constraints, but Brexit-related uncertainties means that companies run the risk of adopting short-term solutions.
The increased mobilization of regulatory capital related to the functioning of notional cash pooling drives discussions between companies and their banks to pricing and conditions of the service. Not surprisingly, interest rates on credit and debit balances are evolving unfavorably for treasurers. Combined with the change in short-term rates in the euro zone, rates of return may sometimes be negative or set at zero. Moreover, while several banks have changed their interest accounting methods, not all of them have extended the new treatment to their clients! It is therefore still possible for treasurers to negotiate.
Accurate knowledge of the treasury cycles of each account included within the scope of pooling is crucial for assessing the additional cost to the bank of operating cash pooling, as a result of the application of the new prudential rules. It is also on this basis that candidates for notional cash pooling must engage in discussions with the various service providers, in order to prevent a multi-currency pooling structure with seemingly undeniable benefits from becoming a costly and restrictive solution for the company after it is implemented.