New liquidity rules for banks may force multinational clients to hold more cash in local branches.

Author: Ronald Fink

Cross-border cash management is likely to become more challenging for multinational corporations as a result of new banking regulations that require banks to hold capital against deposits considered an undependable source of funding.

Many banks, for example, currently enable corporate customers to pool their deposits in different countries, so they can count funds deposited in one country against those used in another. Because such “pooling” of deposits allows companies to use overdrafts without charge, they needn’t go to the trouble and expense of transferring funds from a branch in one country to one in another. Such pooling is called “notional” when banks create a shadow position from a client’s accounts that reflects a consolidated cash arrangement on which interest is paid or charged.

And while notional pooling has posed regulatory and tax challenges in the past, companies have gotten around the issues without much problem.

No longer, say some treasury consultants. They note that Basel III's requirement that banks hold capital for illiquid sources of funding will lead them to charge more for pooling arrangements and may even lead them to cease offering them to all but their most trusted clients.

Treasury Alliance in a client alert on March 10 wrote: “Basel III assigns a poor risk weighting to overdrafts and may require an increase in regulatory capital to support them.”

The consultancy added that formal credit lines might soften the blow but will not entirely remove the need for additional capital. “This will all combine to raise the cost of notional pooling arrangements,” the alert stated. 

Bruce Lynn, a managing partner in Financial Executives Consulting Group, said in an email that physical pooling, where companies actually consolidate their cash in one account, may also become more expensive. “The issue is about deposit levels,” Lynn wrote, “not the means used to consolidate cash balances.”

Overall, he added, Basel III will force companies to confront “some very basic questions” about the use of their cash. Lynn said, “Corporations will need to do a better job of matching sources and uses of funds and communicating their operational deposit targets to banks.”

Yet another treasury consultancy, Treasury Strategies, echoed such warnings in its Spring 2015 Update on Basel III. “The full force of financial regulation,” says the report, “is about to come crashing down onto the desks of corporate treasurers.”           


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