Difference between Zero Balance and Notional Cash Pooling

To put it very simple and straight-forward, whereas a Zero Balance Cash Pools is physically settling end of day balances to a central bank account by means of “physical” transactions, a Notional Cash Pool leaves the original bank balances of the participating bank accounts at end of day untouched.

However, with a Notional Cash Pool the bank will at the end of day virtually aggregate all participating bank balances into one virtual balance. Hence, a Notional Cash Pool is a mechanism whereby the original bank balances are not being touched, but the bank “simply pretends” as if it did happen anyway but by means of a “spreadsheet”.

Again, this is putting it very simple and straightforward to explain the main difference.

What is the end result when using a Notional Cash Pool?

1. In a sensitive business environment where the central Treasury has difficulties touching the money from the participating bank accounts, Treasury has a back door (the Notional Cash Pool) to make use of all the cash sitting in his company.
2. Because a Notional Cash Pool doesn’t make use of physical Cash Pool transactions (the “sweeps”), there are no daily physical transactions from and to the central Treasury. Therefore, there will be no requirement for daily assets and liabilities recording, which are inherent to a Zero Balance Cash Pool.
3. The Notional Cash Pool can also be used to exclusively optimize the interest yield. After all, when bank balances are virtually aggregated, debit balances will be compensated by credit balances. Without a Notional Cash Pool, the consolidated interest for credit balances will most likely hardly cover for consolidated debit interest. Simply because current account debit interest is significantly higher than current account credit interest. With a Notional Cash Pool, the central Treasurer will see at consolidated level a much more favorable interest amount as the bank will apply interest to the cash balance on aggregated level (from the Notional Cash Pool).
4. Whereas a Zero Balance Cash Pool by definition will cash pool only bank accounts denominated in the same currency, a Notional Cash Pool can be Multi-Currency. After all, aggregating the participating bank balances is a virtual aggregation (by means of a “spreadsheet”); in this virtual process various currency balances can easily be converted to a central currency without touching the physical bank balances.

What are the most important points of attention for a Notional Cash Pool?

1. Because de central Treasury can physically use the virtually aggregated balances from the Notional Cash Pool by means of overdrawing the master account of the Notional Cash Pool, the Cash Pool bank runs a risk that one of the underlying subsidiaries in the Notional Cash Pool goes bankrupt with an overdrawn bank account. To protect banks for this risk there is a legal obligation for banks to demand a right of setoff for all participating bank accounts. With the right of setoff, to put it simple, the bank has the right ro pull money from any random bank account participating in the Notional Cash Pool to cover for the loss of a bankrupted overdraw bank account. Regardless the fact that all participating subsidiaries have been signing off for the Notional Cash Pool documentation, including the bank’s right of setoff, most companies do not recognize the implications of the right of setoff ……… till the example of the bankruptcy of a subsidiary with an overdrawn bank account accentually happens.
2. With a Notional Cash Pool the central Treasury will continue to keep the daily necessary extended cash management tasks for working capital financing.

In Paul’s next article more on the advantages of Zero Balance Cash Pooling!