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Basel III undercuts allure of notional pooling 

January 25, 2016

Kimberly Long, Euromoney

Regulatory requirements have increased the cost associated with notional pooling as a liquidity management tool, with many banks restricting the product to their best-rated clients.

Post-financial crisis, notional pooling was one of the tools that received increased interest as companies looked to optimize their internal cash sources.  However, higher bank equity requirements and demands of the liquidity coverage ratio (LCR) under Basel III have raised questions on the future of the product.

Benoit Desserre, Société Générale Notional pooling differs from physical cash pooling in that the funds are not moved between the various locations where a company is based. It has been preferred by large companies as it creates a single funding pool while allowing each organization to retain its own cash position.  Notional pooling also removes the expense of conducting FX transactions, and the need to conduct inter-company loans.

The requirements under Basel III mean outstanding balances within a pool will be netted, leaving the ratios to be calculated on the gross balances. Because of this, banks will need liquidity to cover the pool. Overdraft balances, which see greater scrutiny under Basel III, also require an increase in regulatory capital being held by the banks. Read more

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