by Martin Barrios, Managing Director, Latin America Large Corporates and Multinationals, Global Transaction Services, Bank of America Merrill Lynch
Changes to the global banking and financial market environments are prompting corporates across Latin America to consider in-house banks. Provided they are carefully planned and structured, they can result in significantly lower costs, improved efficiency and enhanced visibility and control.
Financial markets and the banking environment have changed substantially in the wake of the financial crisis, creating both challenges and opportunities for corporates in Latin America. New regulations, most notably Basel III, are changing the ways banks allocate capital while interest rates have remained at historically low levels for an unprecedented period. These conditions are prompting corporates to improve the efficiency of their cash management structures. As a result, many organisations are turning their attention to in-house banking models.
In-house banks (IHBs) have existed at many US and European companies for years, managing a range of functions such as cash management, foreign exchange and funding, on behalf of various entities within a group, and effectively replacing external bank providers for individual entities. Until the financial crisis, the move towards IHBs was driven largely by aspirations to streamline treasury. Now, the starkly different environment – and the chastening experience of the financial crisis – means the main driver for many corporates is to harness as much of their internal liquidity as possible.
As in Europe and the US, companies in Latin America are redoubling efforts to improve efficiency. For example, there is broad recognition among corporates that inter-company lending is often managed poorly in Latin America, with idle balances in key markets such as Brazil receiving no or limited remuneration. Similarly, there is an acknowledged need to optimise trapped cash in some markets in the region. An IHB offers a focused way to overcome such challenges. Moreover, IHB models have the potential to improve efficiency, lower costs, enhance visibility and manage risk more effectively across a wide range of additional areas.