Trésorier/Treasurer magazine - N°91 - Oct/Nov/Dec 2015 - (Page 55)

CORPORATE FINANCE Bank Independent Cash Pooling After you have asked the bank whether you can set up a cash pool, it will get back to you with a set of documents to sign. Careful study of these documents will reveal that the The role that banks have been playing for corporates may change in the near future. - OCT N°91 After you have asked the bank whether you can set up a cash pool, it will get back to you with a set of documents to sign. Careful study of these documents will reveal that the bank has turned things around. The legal wording will show that the bank is requesting a right of offset between the credit and debit balances despite your wish to receive this offset. The documents are worded so that you take on the bank's risk of losses in case (part of) your organisation goes into default. Your organisation assumes this very risk on the bank, but this is not addressed in the bank's documentation. Before the financial crisis this was not a point of much interest for many corporations, but this may no longer be the case. At first, the bank will ask for a pledge of all assets of the entities taking part in the pooling, although technically it only needs a right of offset on the current bank account balances, and not on future cash flows on the bank accounts. The basic mind-set is still that the bank considers the debit balances on the accounts as finance, however big the credit balances on the other accounts are. In the event of the bank defaulting, you will lose the credit balances, and through the pledge of the assets, lawyers will also recuperate the debit balances. Besides that, the bank will charge different costs for missed income because you have requested to set up the cash pool. During the financial crisis we have all gained new perspectives on this landscape. A bank with a solvency ratio of 10% is regarded as a strong bank. But that means that about 90% of the assets consist of capital that is not owned by the bank - assets like the credit balance of your subsidiary. So on top of being a net supplier of liquidity to the bank, you have to pay interest and sign for covenants (virtually giving the ownership of your organisation to the bank). Why should you put up with this way of working? For various reasons it has become more difficult to obtain (bank)funding, and eliminating idle cash on bank accounts has become a quick way in which you can, if nothing else, decrease your external funding needs. Besides, banks can go bankrupt, and their traditional way of working transfers most risks to your organisation. - balance than you are receiving on the credit balance, you may also be paying net interest to the bank. Moreover, you will end up in a discussion with the bank about covenants you have to sign, simply because the bank sees the debit balance as finance, although the reality for you as an organisation is that you are a net liquidity supplier to the bank. As most organisations find this unacceptable, they ask the bank to set up a cash pool on the accounts. A simple solution in this case is to set up a notional cash pool (as a notional cash pool precisely answers the question of the example with the bank involved). LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE The financial crisis hasn't been all bad. It has, for instance, taught us a few things. One of the most important is that the banking landscape has changed significantly. Services that were traditionally offered by banks can now be obtained in alternative ways also because the crisis has enforced developments in technology. As a result, the role that banks have been playing for corporates may change in the near future. Before the financial crisis, few corporations actively measured and managed their risks on financial counterparts, and equally few organisations actively managed their own credit rating. Managing the balance sheet was often considered less important than managing the profit and loss account. Now we have all learned that banks, no matter how big, can go bankrupt. For many organisations it is not that easy any more to obtain funding, and their own credit rating has become an even more important element in creating alternative funding resources. Bid-offer spreads on risk management transactions have also increased significantly, and the names of banks that act as market maker in transactional banking have changed. As a result treasurers may want to reconsider their key treasury policies. As an example, let's look at transactional banking. Suppose your organisation consists of two legal entities, and both have one bank account with the same bank. One entity has a credit balance of 100 and the other has a debit balance of 80. For your organisation, this implies you are supplying net liquidity (20) to the bank. But because you have to pay a higher interest percentage on the debit / NOV / DEC 2015 Bank independency, implementation time of one day, lower costs, more flexibility and no need to sign for unfair covenants. 55

Table of Contents for the Digital Edition of Trésorier/Treasurer magazine - N°91 - Oct/Nov/Dec 2015

Table of contents
INTERVIEW Ben Poole Editorial Services
To What Extent Should Treasurers’ Activities be further centralized?
Capital Markets Union (CMU)
Upsurge in fraud
CEO impersonation
Using analytics to cope with uncertainty and volatility for treasury
IFRS 9 : Nécessite d’une reorganisation bancaire majeure
Taux zéro : de nouvelles stratégies pour un nouveau monde
Investing surplus cash in repos
Warranty & indemnity insurance
Making the switch from Excel to a Treasury System
Corporate treasury in the digital age
Fini le casse-tête des paiements internationaux pour les entreprises !
Bank Independent Cash Pooling
Gérer l’offre de retraites : un choix complexe pour l’entreprise

Trésorier/Treasurer magazine - N°91 - Oct/Nov/Dec 2015