Notional pooling is a mechanism for calculating interest on the combined credit and debit balances of accounts that a corporate parent chooses to cluster together, without actually transferring any funds between the accounts. It is ideal for companies with decentralized organizations that want to allow some autonomy to their subsidiaries, including their control over bank accounts.
The advantages of notional pooling are:
The main downside of notional pooling is that it is not allowed in some countries. It is difficult to find anything but a large multi-national bank that offers cross-currency notional pooling. Instead, it is most common to have a separate notional cash pool for each currency area.
Cross-Border Cash Pool
A cash pool is a cluster of subsidiary bank accounts and a concentration account into which funds flow from the subsidiary accounts. If a pooling arrangement includes accounts located in more than one country, this is known as a cross-border cash pool.
A cash sweeping system (also known as physical pooling) is designed to move the cash in a company’s outlying bank accounts into a central concentration account, from which it can be more easily invested. By concentrating cash in one place, a business can place funds in larger financial instruments at higher rates of return. Cash sweeps are intended to occur at the end of every business day, which means that quite a large number of sweep transactions may arise over the course of a year.
Cash sweeping can be fully automated as long as a company keeps all of its bank accounts with a single bank, where the bank can monitor account balances. Since several banks now span entire countries, it is not especially difficult to locate banks that can provide comprehensive sweeping services across broad geographic regions.
The Zero Balance Account
One way to implement a cash sweeping system is the zero balance account (ZBA). A ZBA is usually a checking account that is automatically funded from a central account in an amount sufficient to cover presented checks. To do so, the bank calculates the amount of all checks presented against a ZBA, and pays them with a debit to the central account. Also, if deposits are made into a ZBA account, the amount of the deposit is automatically shifted to the central account. Further, if a subsidiary account has a debit (overdrawn) balance, cash is automatically shifted from the central account back to the subsidiary account in an amount sufficient to bring the account balance back to zero. In addition, subsidiary account balances can be set at a specific target amount, rather than zero, so that some residual cash is maintained in one or more accounts.
There are three possible ZBA transactions, all of which occur automatically:
A number of rules can be set up in a cash sweeping system to fit the cash requirements of the business entity using each account, as well as to minimize the cost of the system. Rules usually address:
Cash sweeping is not to be engaged in lightly when cash is being moved among the accounts of multiple business entities, and especially when cash is being moved across national boundaries. Cash sweeping can cause the following problems related to interest:
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