16
Aug 2016

Negative interest rates and the end of cash pooling: and why it shouldn’t really matter

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I recently read an article presenting a survey where treasurers discussed their concerns on negative interest. One of the subjects raised was the option of discontinuing cash pooling: an interesting idea which made me wonder how treasurers had come to this conclusion.

Businesses with excess liquidity are currently faced with a situation previously alien to treasurers. It is currently more inconvenient than ever to have “cushioning” volumes of cash available – it is all really confusing. Negative interest rates have led to the absurd situation that cash deposits cost corporates money, and excess liquidity is no longer desirable. The consequence is now to prolong payment terms, to pay suppliers more quickly than necessary, to spend more money and to stock up on inventory.

Working with Cash Pools

We were once all taught that working capital management was to achieve the exact opposite, though cost associated with liquidity is not something new. Shareholders of stock listed companies have always wondered why corporates needed high liquidity stocks instead of paying dividends or investing them in their core business - those investments have always promised to be more profitable than simple Money Markets. Businesses with a net debt position have had to pay for the provision of credit lines for years. Holding onto high volumes of liquidity to keep a business running can easily be put in the same category. Fees spent on business operations – whether with negative interest on company liquidity or indirectly with fees for backup credit facilities – are really nothing new. It just feels different, and it seems that this has unsettled people to the point that we’re now starting to question cash pooling in principle. This reveals that many people misunderstand the real purpose of cash pooling.

It’s important to bear in mind why zero balancing cash pooling was introduced in the first place. The focus should be on two objectives:

  1. Bank accounts or companies with positive balances and bank accounts or companies with negative balances are completely zeroed, balancing out liquidity, optimizing interest payments.
  2. Responsibility is centralized in order to manage liquidity group-wide, long or short from one central department.

Instead, cash pooling has become fashionable and has been portrayed by consultants and other thought leaders as a “must have” - to the point that people have stopped questioning if it really makes sense. For many, cash pools were introduced so these businesses wouldn’t have to consider the balances on the accounts of their decentralized units – they would automatically be zero. That meant not having to bother with IT to collect the respective information any longer. There are even many companies who’ve only established cash pools to avoid reporting. They were using cash pooling as a solution to problems cash pooling was never meant to solve.

Struggling with Cash Pools in an era of Negative Interest Rates

Well, now these very businesses are struggling with their decisions. For them, cash pooling was pointless to start with and with negative interest rates, it is even worse. If central treasury has dodged their responsibility to management up until now, this is the moment they need to step up, instead of resting on their “interest on credit balances” laurels.  

Gaining additional interest on credit balances has never been the actual objective. If we’d only ever looked at the real validity of cash pooling, we wouldn’t be having this debate now. Liquidity is liquidity, whether on a central cash pool account or on subsidiary accounts. Trying to dodge responsibility now is an interesting move that clearly explains the traditional tension between subsidiaries and parent companies in some businesses - and that seems to prove the long held suspicion that the latter only ever wanted to “pocket” the money on these accounts.

Nothing has changed in some respects: cash pooling continues to be a possible and relevant option in case of significant credit or debit balances and/or for businesses who want to manage liquidity centrally. For that, it is completely irrelevant if interest rates are high, low or negative. Maybe the current interest landscape will force people to rethink their overall treasury setup and their main responsibilities. The end result should be an optimized organizational setup that enables businesses to efficiently eliminate risk associated with market volatilities, or at least to effectively manage it without panicking at the slightest sign of difficulty.

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