BankingCash & Working Capital

Tapping the Power of In-house Banks to Turn Cash Puddles into Pools

By April 8, 2021No Comments

Mega-cap treasurers and PwC discuss multiple benefits of IHBs and some complexities of structuring them. 

Treasurers not sold on the value of in-house banks (IHBs) often tell Damien McMahon, a partner at PwC, “We have cash pooling already, and therefore we have a kind of in-house bank,” he recently told a group of NeuGroup members from mega-cap companies.

  • In reality, though, many of the treasurers may have what Mr. McMahon called “cash puddles,” not cash pools.
  • PwC and treasurers from two member companies described turning dozens of small puddles into large cash pools by implementing truly global in-house banks at each company.
  • Among the takeaways from one of the treasurers: The cost savings made possible by the IHB are an added benefit to the bigger goal of achieving the increased efficiency and control IHBs bring to liquidity management.

IHB objectives. Mr. McMahon said one of the treasurers was adamant that the IHB maximize the centralization of the company’s liquidity “back to the US,” a key, but often elusive, goal for most treasurers. The company’s other objectives included:

  • Simplifying cash pooling structures to address cash fragmented throughout the company.
    • The other treasurer that worked with PwC said the biggest driver for establishing the IHB was turning more than 50 “puddles” into two large, centralized cash pools, allowing the investment team to achieve higher yields. “That dwarfed from a value point of view all the other benefits.”
  • Minimizing the number of banks and bank accounts by insourcing services, reducing the fees paid to banks.
    • “A lot of this is to pull away the reliance on third-party banks and bring most of that back in-house,” the first member said. Doing that will produce an 80% reduction in the number of banks the company uses and a 30% drop in physical banks accounts (see graphic below).
  • Centralizing global FX exposures. “There were some trades happening in opposite directions on different sides of the Atlantic and that wasn’t efficient,” Mr. McMahon said about the first client.
    • The other client’s treasurer said, “We ended up with a lower set of exposures we needed to hedge, so it reduced the notional on our balance sheet hedging program,” reducing fees and raising efficiency.
    • “And we reduced the number and volume of spot FX trades we did because of all the intercompany settlement,” another source of savings.
  • Building a scalable and future-proof infrastructure to automate and streamline processes, critical for large, high-growth companies.

Icing on the cake. “When I went into this project it wasn’t really about a cost savings overall; it was mostly looking for efficiencies and control,” the treasurer who reduced bank accounts by 30% said. “But what we did get was a big dollar savings and I think that came holistically, which was a great way to look at it.”

Other IHB benefits. Other members shared additional benefits their companies have reaped from IHBs:

  • Reduced credit exposure. One member called the reduction of credit exposure to banks made possible by his company’s IHB structure one of the biggest benefits. The company, he explained, has higher ratings than a majority of its banking partners.
    • “We’ve eliminated significant counterparty credit exposure” by being able to invest excess cash in US treasuries or prime funds, for example, He said. The company’s alternatives in countries including Argentina and Indonesia aren’t as “robust,” he added.
  • Tax. “There can be some huge tax synergies from this, depending on how it’s structured, where it’s located, etc.,” this treasurer said. “We have found this to be a real value-add both on a pre-tax as well as a tax basis.”
  • Cash ownership. Another treasurer noted that cash is a corporate asset managed by treasury, not business units. “By centralizing and aggregating everything up into an in-house bank or pooling structure, it kind of removes that business unit sense of ownership of that cash,” he said.

One big pool? One of the treasurers listening to the presentation asked what Mr. McMahon called the million-dollar question: “We have two cash concentration structures, one in the US and one offshore. And my big question is how do I get to one pool? How do I move that liquidity daily from our international pool? But if tax law changes I want to be able to unwind it quickly.”

Complexity. The answer is not simple, given that multiple tax, accounting, banking and legal considerations must be evaluated and the exact answer will depend on each companies’ unique facts and circumstances, Mr. McMahon said.

  • However, the two PwC clients found that the complexity could be reduced by establishing an international IHB entity and an overarching US IHB entity, he explained. Each consolidates the positions and settlements for their participants.
    • Liquidity flows can then be settled across these two entities, and participants can also settle global intercompany flows between each other in a controlled way via the IHB entities.
  • Both entities and their positions are managed using one single system and a standard set of processes and automations to take care of the detailed position keeping, accounting and reporting required to manage one combined global liquidity structure.
  • “It should be noted that a careful modelling and tax compliance study should be carried out to understand how much liquidity can be shared and what guardrails are needed to avoid adverse tax and accounting consequences,” Mr. McMahon said.
  • The added advantage of the two IHBs is that treasury can also have a ‘follow the sun” model of treasury support for the business as well as for global liquidity management.

Flexibility. As one treasurer remarked, this structure can also give the flexibility to efficiently manage tax compliance under both the existing tax rules enacted in 2017 and also any reversal or amendment of those rules passed during the Biden administration.

Good, not perfect. And the PwC client said while his company did not opt for the most efficient structure possible from a treasury perspective, “This is what makes legal happy, treasury happy and tax happy.”

  • Treasury and PwC evaluated three structures, each with sub-options. “We came to a realization that option 1 is the best. But within option 1, we have option 1a and option 1b that can still both work and that’s what we’re [working on] today.
  • “And we’re very close. We’re just about there to having the full structure in place.”

 

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Justin Jones

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