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Basel III: No Notional Pooling for New Bank Clients?

  • By Andrew Deichler
  • Published: 10/7/2015
globebaselAs more nations adopt their own versions of Basel III, the future of notional pooling is continually being called into question. Some treasurers of multinational corporations believe that banks may no longer offer it to new customers. Others fear that notional pooling could go away entirely. Whatever happens, it appears that notional pooling is undergoing a metamorphosis and treasurers need to be ready.

At the latest meeting of AFP’s Treasury Advisory Group (TAG), Greet van der Steen, managing director of clients and products in the U.S. for Bank Mendes Gans (BMG), a top notional pooling bank based in Amsterdam, provided attendees with insights into what could happen with pooling as Basel III regulations kick in around the globe.

Basel III does not forbid notional pooling—in fact, it does not reference pooling at all, van der Steen noted. However, given that Basel III imposes stricter requirements on offsetting balances (credit and debit) and forces banks to allocate more capital to this specific cash pool solution, multi-entity notional pooling could become a scarce commodity. Full offsetting is a critical enabler of multi-entity notional pooling.

“If you have single entity pooling, life is a lot easier than when banks offer a structure where you have multiple entities,” van der Steen said. “If you have multiple entities, can you still offset in case of a default? That’s very important. And if you offer a multicurrency solution, you’ll have to take a haircut, because there will be extra capital requirements, versus single currency.”

Some banks may stop offering notional pooling altogether, or only offer it to a limited amount of customers, van der Steen noted. The most likely outcome will be that notional pooling will still be available to treasurers, but they will have to pay more. If so, that causes new problems. “That’s a really interesting discussion,” she said. “You really will have to determine how much extra capital you’ll have to set aside, what the cost is, and how it corresponds with the pool.”

Daniel L. Blumen, CTP, partner with Treasury Alliance Group, agrees that notional pooling will likely become more expensive for corporate treasurers some banks may stop offering it to all but their best clients. “There will still be providers willing to offer the service, but it will come with new pricing and special restrictions—such as not going negative at the end of a quarter,” he told AFP, following a speech on Basel III at the recent EuroFinance conference in Copenhagen.

Notional pooling was already largely unpopular with banks, Blumen noted. “Get a banker offline and most will freely admit that they loathe it and feel it is going away,” he said. “Public positions vary. Corporates currently in notional pools are looking around warily at their banks. One corporate in Copenhagen told me that his main bank doesn’t like it but another bank has offered to do the pool under special conditions. That will change next year, rendering the potential change worthless.”

Blumen believes that it is “quite likely” that banks won’t offer notional pooling to new customers because the setup is difficult. “Might as well keep the old customers and charge them more,” he said. “Notional pooling will not go away as long as someone is willing to pay for it and the costs can be quite high.”

While there is no prohibition against notional pooling in Basel III, Blumen noted that it is difficult to argue that a short-term deposit supporting a short-term loan is stable funding. Therefore, he does not see it as an attractive option for treasurers going forward. “We would not recommend notional pooling to any of our clients in the circumstances I can currently envisage,” he said.

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