A Group With Cash in Twenty Countries and Overdrafts in Ten
Cash pooling lets a multinational offset subsidiary balances so it stops borrowing from a bank while holding idle deposits elsewhere. The mechanics are simple and the legal constraints are not.
The Inefficiency
A multinational group operates through legally separate subsidiaries, each with its own bank accounts. Some generate surplus cash. Others need funding. Left alone, the surplus entities hold deposits earning very little while the deficit entities borrow at a rate well above that.
The group is simultaneously a lender and a borrower to the banking system, paying the spread between the two on money it already owns. Cash pooling is the treasury technique that eliminates this.
A group paying overdraft rates in one country while holding deposits in another is buying back its own money at a markup.
The Two Structures
Physical pooling, also called zero balancing, moves money. At the end of each day, balances in participating accounts are swept into a single header account, leaving each subsidiary account at zero. Surplus cash physically funds deficits. Because money actually moves, each sweep creates an intercompany loan between the subsidiary and the pool header.
Notional pooling moves nothing. Balances stay where they are, and the bank calculates interest on the net position across all accounts as though they were one. A subsidiary with a deficit is charged as if the group surplus offset it.
| Physical | Notional | |
|---|---|---|
| Money moves | Yes | No |
| Creates intercompany loans | Yes | No |
| Subsidiary account autonomy | Reduced | Preserved |
| Bank capital treatment | Simpler | More demanding |
| Cross border availability | Wider | Restricted in some countries |
Notional pooling is operationally elegant and has become harder to obtain, because banking regulation requires banks to hold capital against gross rather than net balances unless strict legal offset conditions are met. Several major banks withdrew or repriced notional products for that reason.
The Intercompany Loan Problem
Physical pooling generates loans between group entities every day, and those loans attract the full weight of corporate and tax law.
Interest must be charged at an arm length rate. A subsidiary lending to the pool for nothing is transferring value, which tax authorities treat as a deemed distribution or an adjustment. Documentation has to exist. Thin capitalisation and interest limitation rules apply to the borrowing entities. Withholding tax may apply to interest crossing borders.
Directors of each subsidiary also owe duties to that company and its creditors, not to the group. A director permitting the subsidiary cash to be swept into a pool serving other entities must be satisfied the arrangement benefits their own company, typically through the rate it receives and its right to draw when needed.
Where Cash Cannot Move
Pooling assumes cash is free to travel, which is not universally true. Several jurisdictions maintain exchange controls or approval requirements that restrict cross border cash movements, and some restrict resident entities from lending abroad.
Groups therefore commonly run regional pools, one per currency or per regulatory bloc, rather than a single global structure. Cash in restricted markets is managed locally and often described as trapped cash, available to the subsidiary and not to the group.
This matters for analysis. A consolidated balance sheet showing large cash reserves may include amounts that cannot be used to pay group debt or fund distributions, and companies disclose this with varying clarity.
Insolvency Risk
The scenario that concentrates legal attention is the failure of a participant. If a subsidiary that has lent heavily into the pool becomes insolvent, its liquidator will pursue repayment of the intercompany receivable for the benefit of that company creditors. If the pool header cannot pay, other participants may face claims.
Cross guarantees, which banks usually require to support notional structures, extend this further by making each participant liable for the others. That is precisely the exposure a subsidiary director has to weigh.
The Bottom Line
Cash pooling captures a genuine saving by stopping a group from borrowing and depositing simultaneously, and the arithmetic is compelling enough that most multinationals run some version of it. The complexity is legal rather than financial: intercompany loans require arm length interest and documentation, subsidiary directors owe duties to their own company, exchange controls leave cash stranded in some markets, and the structure concentrates credit exposure across entities that are separate in law. The treasury saving is easy to calculate and the constraints determine what shape the structure can take.