Will Basel III Spell The End For Notional Pooling?

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

JPMorgan Chase has made good on predictions that the Basel III bank regulatory regime would alter the industry’s relationships with corporate clients. We’ve previously reported on some of those predictions. Chief among them has been the idea that new rules that focus on the liquidity of banks’ liabilities as well as the riskiness of their assets would lead them to charge new fees and impose other limits on deposits. We also reported that JPMorgan was a likely candidate for doing so. And the bank has lived up to that billing, according to the Wall Street Journal.

But there’s more to come, according to corporate treasury experts. Some, including Treasury Alliance, go so far as to predict the end of so-called notional pooling, a cash management technique commonly used by multinational corporations to reduce the time and money involved in cross-border, intra-company funding.

Under such arrangements, the bank agrees to count as one sum all the cash a company has in accounts in its branches in different countries—offsetting interest income and expense as a result of positions held in different branches. So, for example, cash in an account in a JPMorgan branch in Paris could be counted in arrangements to fund a company’s operations in Australia under an overdraft made at a JPM branch in Sydney. The idea is to eliminate the time and fees involved in actually transferring the funds from the branch in Paris to the one in Sydney or making an intra-company loan for the purpose. It also cuts FX risk as a short-dated swap or conversion to a base currency is incorporated in the program.

But Treasury Alliance, in its report issued earlier this week (see link, above), suggested that Basel III might end notional pooling because of concerns that it posed a threat to the liquidity of a bank’s deposits. Under new liquidity rules that take effect this year, banks may have to raise more capital to fund such arrangements, and that would reduce bank returns on the arrangements.

Observed Jeff Wallace, a principal in Greenwich Treasury Advisors, in an interview with Global Finance: “You’ll want to get out of the room as quickly as possible if your bank doesn’t view global cash management as a good business for them.”

Yet another Treasury consultancy, Treasury Strategies, echoes that warning in its 2015 Spring Update on Basel III. The report says: “The full force of financial regulation is about to come crashing down onto the desks of corporate treasurers.” The update goes on to note that corporate treasurers have long valued banks for the liquidity they can provide but that soon, “banks will value corporate treasuries for the liquidity corporates can provide.”