Notional pooling

Notional pooling is a cash concentration system that allows cash to remain where it is and under local control, but which is recorded at the bank as though the cash has been centralized. If a bank offers notional pooling, it simply combines the ending balances in all of a company’s accounts to arrive at an aggregate net balance. If the result is a positive cash balance, the bank typically invests the funds automatically and pays the company interest income on the amount invested. If the result is a negative cash balance, the bank charges interest on the net negative amount.

The notional pooling concept is particularly useful when individual accounts are owned by subsidiaries that want control over their cash, and do not want to see it commingled in a central concentration account.

Another advantage of notional pooling is that a few banks offer pooling across currencies. This means that interest is earned on cash holdings denominated in multiple currencies, without ever having to engage in any foreign exchange conversions into a single investment currency.

Some banks offer the automated allocation of interest income back to the accounts where cash is stored, based on the actual amount of interest earned and the relative proportions of cash in the various accounts included in the pooling arrangement.

Notional Pooling Problems

Though notional pooling initially may appear to be an ideal solution, there are some problems that limit its use. These issues are:

  • Availability. Notional pooling systems are prohibited in some countries, and are impractical in others where banking systems are not sufficiently integrated to allow for the virtual aggregation of funds. The reason for the prohibition of notional pooling is that some governments believe that such pooling constitutes a co-mingling of funds from different entities. Notional pooling is allowed in most European countries, but is not allowed in the United States.
  • Legal restrictions. Even when notional pooling is allowed, some countries restrict its used to wholly-owned subsidiaries. Other countries do not allow notional pooling to include accounts located in other countries.
  • Single bank network. The approach only works within the account network of a single bank, since the bank must have the capability to “see” all account balances. If a company uses multiple banks, it can instead employ a separate notional pooling arrangement with each bank, or a mix of notional pooling and cash sweeps.
  • Recognition of interest income and expense. A notional pooling system awards interest income to the corporate parent. As was the case with cash sweeping, this means that some tax jurisdictions will want that interest income to be allocated back to the subsidiary level. The same allocation is needed for interest expense, if an account carries a debit balance. These allocations should be fully documented, since they may be perused by tax auditors.

For the first three reasons just noted, notional pooling tends to be a partial solution that works well in some areas, and is not available or allowed in others. Consequently, and despite the attractiveness of the concept, it is more likely to be implemented in a patchwork manner, with different systems installed in different parts of the world.

Notional Pooling Costs

The cost of notional pooling is lower than for cash sweeps, since no transactions are used to move cash between accounts. Also, the time that might be required by the treasury staff to manually move funds is eliminated. Finally, the bank overdraft expense that might otherwise be charged on accounts having negative balances is eliminated, since the debit and credit positions in all accounts are merged through notional pooling; ideally, credit positions will exceed the amount of any debit account balances.

Summary

When it is available, notional pooling is administratively simple and allows for the retention of cash in accounts at the local level. However, the system is not allowed in some countries, and cannot be used as a single system where accounts are being administered by multiple banks.

Related Courses

Corporate Cash Management 
Treasurer's Guidebook