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Notional Pooling

Notional pooling (also known as interest allocation) is a bank service that, on a daily basis, offsets debit and credit balances of a company’s separate accounts to calculate a net balance. The bank pays interest on a positive overall position, or charges interest on a negative net balance. The individual balances never physically move and there is no commingling of funds. Notional pooling is available in most countries with a well-established, nationwide banking system.

The pooling calculation is performed entirely on the books of the bank. It can significantly cut the costs of borrowing for a company and improve returns on any cash surpluses. All balances have to be within the same bank network, which also contributes to rationalization of the banking structure. There is usually a requirement that the subsidiaries be reallocated debit or credit interest on an “arm’s-length” basis, that is, at, or close to, market rates.

Notional pooling is a good tool for cash managers to administer intercompany liquidity. However, there are some issues with regard to pooling that vary by country. In some jurisdictions, only accounts of wholly-owned subsidiaries can be pooled. In others, resident and nonresident balances cannot be commingled, or pooling is prohibited entirely. Although the demand today from the corporate world is for cross-border, multicurrency notional pooling, tax and legal issues become considerably more complex, so this is not easily accomplished.