Cash & Liquidity Management

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In-House Banks: Gaining in Popularity Increased FX volatility within Latin America has prompted many companies to reconsider how they manage FX risk and seek more effective ways to move funds between entities and reduce their exposures.

In-house Banks Come of Age

Structure promises financial and strategic transformation

by Martin Barrios, Latin America Large Corporate and Multinationals Sales Executive, Global Transaction Services and Luiz Carlos Couto, Latin America Financial Institutions Sales Executive, Bank of America Merrill Lynch

Corporates with operations around the world are facing numerous challenges today. The geopolitical and economic environment – both regionally and globally – is creating uncertainty and hindering growth, while interest rates remain at record lows. Within Latin America, foreign exchange (FX) volatility has increased, prompting companies to reconsider how they manage FX risk and seek more effective ways to move funds between entities and reduce their exposures.

At the same time, new bank regulations are being introduced – most notably Basel III, which is expected to increase banks’ costs of holding high quality liquid assets required for certain types of deposits under Basel III’s liquidity coverage ratio. As a result, it will change banks’ appetite for certain types of deposits, and impact the rate of return on long-term deposits.

Companies are responding to the challenges they face in a number of ways, and starting to strongly consider the use of in-house banks (IHBs) to improve visibility and control over FX and funding, help mitigate some of the risks presented by economic uncertainty, and improve operational efficiency, enabling better use of internal balances.

How they work

IHB structures are designed to manage a range of treasury functions, including cash management, foreign exchange and funding. Additionally, they may be able to conduct payments and collections in a range of currencies – both inter-company and externally - on behalf of various entities within a corporate group, replacing external bank providers for corporate group entities across many, though not all, banking functions. With an IHB, each subsidiary’s account is credited or debited according to receivables and payables flows. In addition, IHBs may enable corporates to aggregate surplus cash to take advantage of investment and/or business opportunities.

Interest in in-house banks grows

Historically, Latin America has lagged other regions when it comes to using IHBs. Unlike Europe, for example, which has common standards, such as the Single Euro Payments Area (SEPA) that facilitate in-house banking, Latin America remains an extremely diverse region, with different fiscal structures in each country and widely varying regulations and FX controls.

The region’s largest markets – Mexico and Brazil – both have complex fiscal environments, while Brazil also has rigid FX controls. Similarly, countries such as Chile, Peru and Colombia all present specific challenges (as do smaller markets such as Panama and Costa Rica) while Ecuador, Bolivia and especially Argentina and Venezuela have extremely restrictive regulatory environments.

Although the regulatory and legal hurdles facing companies have changed little in recent years, there is a gradual trend towards liberalisation that has spurred corporates in Latin America to consider in-house banks. Just a few years ago, it might have been hard to overcome the challenges of using an IHB, but with technology advances, including greater use of SWIFT connectivity and advanced ERP systems, IHBs are easier to implement than in the past.

In-house bank benefits

IHBs offer multiple benefits, the importance of which depends on the company’s operational footprint and organisational model. For example, companies in the metals and mining sector are typically capital intensive and therefore benefit from the greater credit lines and flexibility that can be extended to an IHB. In contrast, retail companies, which generate lots of cash, may have little requirement for capital but might have significant trapped cash, due to regulations in the countries where they do business. Extremely large companies might deploy an IHB primarily to improve visibility and control across the organisation.

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