By Joseph Neu
Regardless of the outcome of the US presidential election, US multinationals will continue to need to cope with an increasing amount of their cash being generated offshore and largely “trapped” from a US or local tax and regulatory perspective. This persistent reality has those serving US multinationals striving to develop better frameworks within which to reconsider their global liquidity management.
Back in September, at the pilot meeting for The NeuGroup’s Assistant Treasurers’ Group of Thirty (AT30), Ron Chakravarti, Citi managing director and head of client solutions and advisory for liquidity management, presented one such framework. The core tenets of his framework are as follows:
1) Effective global liquidity planning requires reassessing and realigning strategies to changes in an enterprise’s trading, treasury and working capital models…and, for many multinationals, each of these are changing rapidly with the shift of business to Emerging Markets.
2) An evolving In-house bank (IHB) structure greatly enhances treasury’s ability to support changing trading and working capital models, become more effective at global liquidity and risk management, and mitigate the build-up of local trapped cash while preserving its value.
3) An evolving IHB structure enhances treasury’s ability to support changing trading and working capital models, execute effective global liquidity planning and mitigate trapped cash while preserving its value.
A member presentation at the AT30 in September demonstrated the flexibility of an in-house bank to deal with a less-than-common legal entity structure. And Mr. Chakravarti’s outline of the past and anticipated future evolution of in-house banks and related efficiency structures also resonated with many in the room. The overwhelming sentiment from these practitioners was that in-house banks would likely grow in importance in their treasury models going forward.
As further validation, in the pre-meeting survey for the NeuGroup for tech treasurers, The Tech20, meeting this month, we asked what changes members had made to their treasury support structures in the last 3-4 years. The implementation or expansion of their in-house bank featured most prominently in their responses.
One factor might be the flexibility in-house banks offer treasury to deal with liquidity across a wide variety of legal entity schemes—a characteristic highlighted in the AT30 presentation. This is necessary because most US MNCs bias their legal entity and flow of funds structures heavily toward reduction of the effective tax rate, as opposed to enhancing usable liquidity. On a 5-point scale, with 5 being a total bias toward reduction of the effective tax rate, responses in a NeuGroup survey averaged just over 4.
how wide for an IHB?
Of course it’s easy to say that IHBs are the answer if you define them such that every treasury center and/or shared-service center with treasury components gets labeled an in-house bank. And if you look at how IHBs are said to be evolving, the standard definition does indeed get muddied a bit.
However, IHBs got started with the idea that treasury would set up a structure so that affiliates with excess liquidity would deposit their cash in-house rather than with an external bank and affiliates in need of liquidity would similarly borrow in-house. The use of arm’s-length payment and receipt of interest, rather than the coercion of ownership, opened the door to more flexibility for treasury to manage liquidity across a variety of legal entity types and ownership structures.
And, if you take arm’s-length pricing to other services, like FX and bill paying, you can expand the model accordingly.
What’s more, by expanding their geographic scope, MNC treasuries can start to mimic global banks in all their arcane planning to maximize liquidity, while also mitigating tax and regulatory restraints on it. The bad news is that bank-like gains on liquidity eventually require bank-like compliance and planning resources. Justifying these resources is easier for a bank pointing to revenue and profit metrics, than it is for a treasury operating as a cost-center. This will be the ultimate factor in determining how far in-house banks will evolve: those that are valued for their P&L impact are likely to go farther faster.