In treasury’s ever expanding world, liquidity planning is becoming increasingly global and important. This is particularly true in emerging market countries, where it is sometimes necessary to take more creative paths to ensure liquidity. In-house banks (IHB) can be very helpful in ensuring consistency and efficient movement of funds. At a recent NeuGroup Assistant Treasurers’ Peer Group meeting in late 2012, one member presented an overview of his company’s in-house bank and liquidity planning.
The in-house bank. One of the benefits of using an IHB at this company is that it centralizes management of critical functions. In this case, the IHB allows HQ to keep control while also engaging regional centers in Europe and Asia. Treasury activities around the globe remain strategically aligned allowing operating companies to focus on their business. Additionally, the IHB sweeps cash (where legally allowed) to HQ from the operating companies daily, and from there operations can be funded from HQ as needed, in accordance with legal restraints. Eurozone countries are structured similarly, while Asia, the Middle East and Africa have country specific structures. Representing those legal restraints for repatriating cash, China is designated a “permanently reinvested earnings” operation, .
As an added incentive for operating companies to optimize their cash flow and working capital, the IHB pays and charges interest on the deposit balances of the legal entities.
Don’t lose cash accessibility in new markets. While companies reorganize their legal entity structures and cash flows to reduce their tax rates, they must not lose sight of keeping the cash accessible. The same is true when expanding into emerging markets. To ensure access to cash, some companies have a playbook for expanding into new markets that includes specific plans for intercompany loans and liquidity structures. It was noted that more companies are using more advanced IHBs and expanding to more legal entities in more jurisdictions. But in the end, the point is not the structure itself but the existence of a proxy for centralization and liquidity management. What helps here is a tight alliance between treasury, tax, legal and financial reporting, which is essential for coordinating cash moves.
Where are you in the treasury evolution? One chart shown during the session resonated with most members: a diagram depicting the evolution of a treasury structure toward greater centralization. It starts with the days of separate liquidity management by entity, with no commingling of cash, and evolves toward cross-entity liquidity management on a regional, then global basis. This was followed by netting structures that evolved from cash settlement to cashless. The chart shows the ultimate structures including “pay-on-behalf-of” (POBO) and “receive-on-behalf-of” (ROBO) evolving toward an IHB that is integrated with business units. It was noted that given pro-business changes in regulation in many countries, MNCs are extending IHBs across more jurisdictions and subsidiaries, along with structured liquidity management arrangements (e.g., global ZBA sweeps/pools) to centralize liquidity.
While efficient tools have been in place for many years, the global growth of companies combined with many restrictions on cash by local regulations and taxation rules have also contributed to the importance of the discipline. An IHB can help in this regard, putting the needed focus on the importance of liquidity management.