Notional Cash Pooling

Basel III, projected to come into effect before 2019, would have huge inferences on the notional cash pooling business, making it very difficult for banks to offer this service profitably. This is likely to make certain banks reassess the business. They would most likely either reprice their offering or exit from the business.

Notional cash pooling enables firms to oversee finances for the group from a specific account, offering corporate treasurers an appropriate, combined view of accounts that could be spread across several associated organizations, in various jurisdictions and currencies.

It is not permitted in the US. However, it is prominent in Europe and Asia as an effective method for huge multinational firms to manage their balance sheets at a group level. It permits the firms to balance their liabilities, including those of their affiliates against their assets.

At the same time, by ensuring the increased transparency that is required to protect the financial system, Basel III has created a requirement for banks to report all the assets and liabilities of their clients distinctly.

This would not have substantial inferences for physical cash pooling. However, as far as notional cash pooling is concerned, where there has been no physical transfer of funds between currencies, it places an additional burden on firms with extremely increased disclosures of their liabilities.

Where currencies are managed distinctly, but as a portion of a specific master account, the liabilities related with every currency position would have to be disclosed, and have an equity capital distribution set against them, usually ranging from 11% to 13%.

As far as banks providing notional cash pooling to clients are concerned (though they are comparatively few), this would most likely have implications for leverage as well as liquidity coverage ratios. The number of firms using this service is also comparatively modest, but the ones that do are among the banks’ main clients.

Notional cash pooling for such clients could have a substantial impact on a bank’s balance sheet. In several instances, the impact on leverage and the LCR would weaken the case for providing the service to distinct clients. It would mean that some banks could pull out of the business.

On the other hand, the regulation does not transform the fundamental requirement for firms to effectively manage their balance sheets.

Notional cash pooling would still be engaging for clients with extensive businesses, where the treasurer would like to have a holistic assessment of group finances. It ensures the firm need not manage FX positions in the market, which could be a substantial cost in itself.

It also eliminates the requirement for inter-company loans and provides the group treasurer much more control over cash inflows and cash outflows within the group.

It also offers significant operational flexibility. Cash pooling permits firms to function in new jurisdictions without establishing relationships with regional banks to deliver local currency.

Notional cash pooling is all about effectiveness: where a huge and varied group could require several treasurers globally, it allows the function to be efficiently centralized in a particular place, managed by a distinct treasurer.

Certain banks may exit the business since it would be difficult to earn a profit from it, continued demand ensures that the product itself would survive. Firms must be ready for an interruption. However, they should not be discouraged if their early discussions with banks do not proceed the way they wanted.

According to Arnaud Pichon, international desk supervisor at Société Générale, “The nature of the product means that while a client’s business might have a significantly detrimental impact on one bank’s balance sheet, it might have a much smaller impact, or even a positive impact, for another bank.”

For e.g., a bank that has a significant amount of USF, but little GBP on its balance sheet could turn down a client having most of the cash in USD, but accept a client having most of the cash in GBP. A bank with reverse exposures could take the opposite view. Therefore, treasurers must communicate with as many banks as possible, to identify the bank with the best plan.

Cash management has usually been a complex business, and firms have tended to stay with their providers if they are satisfied with the service being offered. Shifting providers require substantial effort, so several firms would certainly prefer to maintain their existing relationships.

Despite this, firms must use the next two years to review their existing arrangements and determine whether they are viable. Even if their business is attractive to their bank at present, any transformation of conditions, such as a large acquisition, could greatly transform the feasibility of that relationship.

According to experts, at present, firms engaged in notional cash pooling require a backup plan. They must seek clarification from their banks whether the service would be repriced or terminated because often it would be one of the two.

Banks have been known to exit from the business in the past, indicating how disruptive this could be for their clients. Firms should not wait to receive information that the terms of service must change. Instead, they should be identifying a provider who is willing to offer the service at the best price.

The use of notional pooling is expected to increase in the future. It would provide firms with a better understanding of their financial position and therefore, they would be able to manage their money more efficiently.

The Bails on the Gales

Bail-out has been a very common term in the financial terminology that most of us are aware of and has been a great escape route during the Global Financial Crisis. But, these days, a new term is taking over the Global financial market with a lot of pace. The term is ‘Bail-in’. The name has emerged as the alternative to bail-out and is taking over the market like a whirlwind.

Delineating Bail-in:

The first question that runs through most of our minds is ‘What is this much talked about Bail-in?’ Answering it in the short, straight and easy language, one can say that Bail-in is the opposite of the legendary Bail-out. Going by the definition of the term Bail-in it can be said that the term refers to rescuing a financial institution that is on the verge of break-down. This is done by making the creditors and depositors of the institution bear the loss on their holdings. Cyprus gave the term to the world and had been in discussion since last six years now.

Why is Bail-in needed?

Ron Paul, the American Republican Congressman, has answered the question long before it even arose. He has said that when the bailout of a failing company is done, the money is being confiscated from the productive members of the economy and is given to the ones who are failing miserably. By assisting the companies that have antiquated work model, the government is interfering with the economic phenomenon. He said that an essential element of a healthy and thriving economy is that both the success and the failure must be allowed to happen as they are earned. By bailing out incompetent institutions, the government is preventing the liquidity of their resources and their availability to the companies that can put them to better and more productive use. The bailout is reversing the rewards by giving the proceeds of the successful ones to the ones who are failing miserably. This makes the bailout unhealthy for the economy. That’s how the Bail-in has become vital. Bail-in will prevent the moral hazard of the failing companies thinking that they can afford to make such losses.

What lies ahead for Bail-in?

The Cyprus Banking Crisis has led to the belief that the use of the Bail-in strategy would be extensive. It will be mostly because it will evade the difficult political issues associated with the bailouts of the taxpayers, while it will still contain the risk that is related to letting bank failures lead to the systematic failure destabilization.

There is a risk of Bond Markets reacting negatively. The increasing popularity of Bail-in can increase the risks for the Bondholders. This, in turn, will lead to the increase in the demand for the return they receive from lending money to these institutions. This can further lead to a rise in the interest rate that will in return hurt the Equities. All of this will end up in costing more in the long run than in a one-time recapitalization because the Future Capital will get much more expensive.

Cyprus has set a criterion and now the countries have an idea about what results it will fetch. It is very likely that the Bail-in and the Bail-out will see a combined future together.

Conclusion:

Neither the Bail-out nor the Bail-in has been a choice. They both have arisen out of the necessity. It’s just that the Bail-in does not let the taxpayers pay for the mistakes of the big financial institutions, one thing that has been resented since the big financial crisis. As the Bail-in is spreading its wings, it will be interesting to see how it makes its space in the Bail-out ruled system with its pros and cons.

Bail-in is the antonym of Bail-out. Bail-in refers to rescuing a financial institution which is on the verge of bankruptcy. By bailing out institutions that are making heavy losses, the government is preventing the liquidity of their resources. they are also holding back the availability of their resources to the companies that can put them to better and more productive use.The Cyprus Banking Crisis has established that the use of the Bail-in strategy would be extensive.There is a risk of Bond Markets reacting negatively to bail-in as the increasing popularity of Bail-in can increase the risks for the Bondholders.

The Future of Financial Services

The ease of making financial transactions and financial services in general, had first been revolutionised when telegraph companies introduced wire transfers. But with the coming of new age financial services like Bitcoin and Ripple, it is the time we address the question of what the future holds for the financial services of the world.

Traditional Wire Transfers

Let us begin by first taking a look at how things have been going on for these past 150 years since wire transfers were first introduced. Transferring funds using a wire transfer method via a bank is not a single step process but a multi-step process. It is like this:

The sender approaches his or her bank and orders the transfer of funds to an account. Unique codes like BIC and IBAN codes are provided to the bank by the sender so that the bank knows exactly where the funds need to be transferred.

The sender’s bank contacts the receiver’s bank by sending a message through a security system, such as Fedwire or SWIFT, signalling it that a transfer needs to be made. The receiver’s bank receives this message, which includes settlement instructions as well, and then asks the sender’s bank to transfer the amount specified in the message.

The sender’s bank now transfers the amount. This is not done in one go but bit by bit, so it can take anywhere from a few hours to a couple of days for the entire sum to be transferred.

To make the transfer, the two banks must have a reciprocal account with one another. If that is not the case, the transfer is made through a correspondent bank that holds such an account.

As one can see, this form of transfer relies overly on a mediator, takes more time than it should, and can prove to be costly as the banks charge some fee for their service. Distributed currencies like Bitcoin provide a viable alternative to this process.

Decentralized Currencies

What sets services like Bitcoin apart from traditional services is that they do not rely on a central mediator but rather operate using cryptographic protocols. The process is therefore faster, simpler, and much more efficient. The system is quite transparent to both end users as well while traditional systems are susceptible to fraud due to the complex process involved.

However, there is a downside to this too. With services like Bitcoin, it is simple to trace a transaction back to each unit value’s creation.

Solution? A Common Ground

More and more people are opting for services like Bitcoin and peer-to-peer mobile transfers, where a network operator could help users transfer funds by simply sending an SMS. Although these are indeed more efficient, they are a long way from global acceptance because there are many who still do not have bank accounts, plus there is the issue of limited user identification in such services.

What would be ideal for everyone is if banks could tap into the potential of decentralized currencies and overlap the source code of services like Ripple on their existing system to form a hybrid of the two. It would kill two birds with one stone as:

Decentralized currency systems provide more efficient transfers

Bank systems ensure only registered users access the service, taking away the possibility of foul play.

Conclusion

The world has come a long way since the last time an indigenous financial service system was introduced. There is definitely a crying need to improve this traditional service and decentralized currencies like Bitcoin have shown them the way.

The Case for Making Invoice Factoring the First Choice in Business Financing

In the United States, Invoice Factoring is often perceived as the “financing option of last resort.” In this article I make the case that Invoice Factoring should be the first option for a growing business. Debt and Equity Financing are options for different circumstances.

Two Key Inflection Points in the Business Life Cycle

Inflection Point One: A New Business. When a business is less than three years old, options for capital access are limited. Debt financing sources look for historical revenue numbers that show the capacity to service the debt. A new business doesn’t have that history. That makes the risk on debt financing very high and greatly limits the number of debt financing sources available.

As for equity financing, Equity Investment dollars almost always come for a piece of the pie. The younger, less proven the company, the higher the percentage of equity that may need to be sold away. The business owner must decide how much of his or her company (and therefore control) they are willing to give up.

Invoice Factoring, on the other hand, is an asset based transaction. It is literally the sale of a financial instrument. That instrument is a business asset called an invoice. When you sell an asset you are not borrowing money. Therefore you are not going into debt. The invoice is simply sold at a discount off the face value. That discount is generally between 2% and 3% of the revenue represented by the invoice. In other words, if you sell $1,000,000 in invoices the cost of money is 2% to 3%. If you sell $10,000,000 in invoices the cost of money is still 2% to 3%.

If the business owner were to choose Invoice Factoring first, he/she would be able to grow the company to a stable point. That would make accessing bank financing much easier. And it would provide greater negotiating power when discussing equity financing.

Inflection Point Two: Rapid Growth. When a mature business reaches a point of rapid growth its expenses can outpace its revenue. That’s because customer remittance for the product and/or service comes later than things like payroll and supplier payments must take place. This is a time when a company’s financial statements can show negative numbers.

Debt financing sources are extremely hesitant to lend money when a business is showing red ink. The risk is deemed too high.

Equity financing sources see a company under a lot of stress. They recognize the owner may be willing to give up additional equity in order to get the needed funds.

Neither of these situations benefits the business owner. Invoice Factoring would provide much easier access to capital.

There are three primary underwriting criteria for Invoice Factoring.

The business must have a product and/or service that can be delivered and for which an invoice can be generated. (Pre-revenue companies have no Accounts Receivable and therefore nothing that can be factored.)

The company’s product and/or service must be sold to another business entity or to a government agency.

The entity to which the product and/or service is sold must have decent commercial credit. I.e., they a) must have a history of paying invoices in a timely manner and b) cannot be in default and/or on the brink of bankruptcy.

Summary

Invoice Factoring avoids the negative consequences of debt financing and equity financing for both young and rapidly growing businesses. It represents an immediate solution to a temporary problem and can, when properly utilized, rapidly bring the business owner to the point of accessing debt or equity financing on his or her terms.