In-house banking

The best possible results in Group Treasury depend on professional banking. There is great potential not only externally, but above all in in-house banking.

Inhouse bank - not all banking is the same

A basic distinction must be made between three types of banking:

1. Classic external banking, in which there is a 1:1 relationship between the group company and one or more external banks and is managed on a decentralized basis.
2. Corporate banking, which on the one hand concentrates central elements at the headquarters of a group:oInternally, mostly for financing and related internal loans and larger foreign exchange transactions; and / or on the other hand also offers banking services for external companies.
3. Inhouse banking, which is the perfection of the image of an external bank for all internal companies. This article deals exclusively with the topic of in-house banking. The following is a schematic representation of an in-house bank structure.

Legal structure of an in-house bank

An in-house bank can either

1. be an imaginary entity within the legal structure of a group that has no independent legal personality and does not form separate company codes, or
2. a legal entity (usually) identical to the operating parent company, which has its own cost center or even its own company code within the group.
3. However, the in-house bank can be a separate legal entity - especially in larger groups - which is held and controlled by the parent company in the form of shareholdings, but is legally independent to the extent that it can carry out all types of financial transactions with external and internal parties for its own account and is therefore also considered a separate entity for tax purposes. Under certain circumstances, even in a favorable foreign environment, which, for example, has the best possible bilateral interest tax agreements with the countries important to the group and / or results in the lowest possible taxation of surpluses. Specifically as follows:

The ideal location

A) Tax aspects

The legally independent in-house bank is a separate taxable entity with all rights and obligations. This means that the taxable objects of the in-house bank, namely the financial transactions, can be settled externally and internally at a better tax rate (from the group's point of view), whether as capital and/or profit tax. In particular, double taxation agreements (DTAs) between the various countries can benefit from simpler and lower rates. Example: Group A, headquartered in Germany, has subsidiaries in South Africa, Indonesia and Australia. The double taxation agreements between Germany and these countries are not as simplified as, for example, between the Netherlands and these countries.

B) Processing aspects

Everyone wants to be able to offer their customers the lowest possible price for their products and services in order to create a decisive competitive advantage. Cost optimization is therefore always an issue. Standard processes in particular, which are also becoming more efficient with the help of new or better software, require less and less detailed technical knowledge and can therefore also be carried out in countries with a lower education rate (and therefore more cheaply) (provided the quality can at least be maintained). An example of this is the centralization of payment processes, keyword payment factory, but also for processes where know-how is difficult to obtain, countries with a high specific training rate in this area are a good choice. Take IT services, for example, which can be well placed in India.

Standardized processes

In the vast majority of cases, standardization of processes brings great advantages. Not only from a quantitative point of view, but also in terms of quality. An in-house bank is a prime example of such process optimization in the entire financial structure of a corporate group. Instead of individual subsidiaries each managing their liquidity holdings at numerous banks on even more accounts, this liquidity can be bundled in nostro accounts at the in-house bank, while the payments (with a few exceptions, e.g. wages) are made via a central payment factory; the same applies to foreign exchange transactions and loans, which are only made exclusively with the in-house bank. This offers enormous potential for greater security, transparency and efficiency.

Risk minimization

When it comes to security, risk management is paramount. The Inhouse Bank is able to optimally manage the FX and interest rate risk at all times by bundling all of the transactions of the banks. This allows netting potentials to be realized with all the manifold advantages as well as transparent and highly effective exposure management.

The following is a real example of foreign exchange positions:

This report may seem trivial. But what lies behind this in-house bank approach to foreign exchange transactions and offers new opportunities is enormous.

1. Firstly, a distinction is made between internal and external FX risks, including the associated credit lines and settlement risks.
2. With this approach, a group-wide portfolio hedging strategy is possible, which makes it possible to concentrate on the risk and not just on individual currency pairs. In this case, the open position for the group is only - 264.2 EUR units. These 264.2 can now be set to 0 with a single countertrade and the group has only one net hedge instead of four! The main risk in this portfolio is clearly short EUR/USD.

Summary

The Inhouse Bank (IHB) is much more than a well-intentioned partial central office for some tasks of the finance department. Rather, it offers a one-stop solution for the very important areas of

• cost efficiency
• process control
• risk minimization
• tax optimization

which can be continuously improved with relatively little effort than would be possible on a decentralized basis.

A very careful preliminary study aimed at long-term results is extremely important before implementation, so that the greatest possible success can be achieved for all affected areas. A careful project is always, but especially for the introduction and expansion of an in-house bank, of central importance. Not only the long-term, but also the immediate short-term benefits are significant and of great importance for any company whose structure lends itself to in-house banking.