Basel II is a revised version of the 1988 Capital Accord, written by the Basel Committee on Banking Supervision(BCBS). Its formal title is the International Convergence of Capital Measurement and Capital Standards:A Revised Framework.

Basel II aims to produce greater consistency in the way banks and their regulars approach cross-border risk management. One of its main goals is to align regulatory capital with risk management, which was deemed one of the failings of the original Accord.

Basel II is based upon three “pillars”

• Pillar I:Minimum Capital Requirements. Improvement and standardization of the calculation of three major risks which banks face:credit risk, operational risk and market risk
• Pillar II:Supervisiory Review Process. Provision of a framework for regulators when dealing with all other forms of risk, which the Accord refers to as “residual risk”
• Pillar III:Market Discipline. Increase in disclosure requirements for banks to allow better market visibility and more informed pricing from counterparties.

As group treasurer, you need to enable your cash in all your various banks to generate interest. Very often, you are being approach by banker(s) to do cash pooling or concentration of balances.

This articles look at what’s are cash pooling- its advantages and it basic mechanism.

Cash pooling is simply a banking structure where balances on a number of separate bank accounts are treated COLLECTIVELY for interest purposes. By pooling these accounts together or this concentration of bank balances, it optimizes the amount of interest companies both pay and receive as the bank who ask you to pool will consider the total “pooled” balance when computing the interest.

So, the main benefit of cash pooling is to improve liqudity management as total cash balances can then be managed centrally rather than locally.

Next, there are two ways of handling/conducting cash pooling:

- by the “physical” basis whereby funds are actually transferred from participant accounts into a master(or header) account at the end of each day or each week or each month.

-by the “notional” basis  where no physical movement of funds takes place. Here, the bank offsets the debit and credit balances of participating accounts to compute the pool’s net interest position. Certain countries like China do not permit the notional pooling basis .

An effective transfer pricing system in the context of a divisional organization has to satisfy several basic criteria. The challenge is presently no transfer pricing system has been perfect. However, for an effective system of transfer pricing, some of the basic criteria need to be satisfied:

• it should encourage divisional managers to actin the best interests of the organization as a whole eg maximise the wealth of the shareholders and achieve goal congruence
• facilitate the assessment of management performance by ensuring that one division is not subsidizing another division
• support divisional autonomy eg managers should be abl to purchase from the cheapest supplier
• the transfer pricing should be deemed to be fair
• the system should be clear and understood by all concerned
• if appropriate, the system should aim to minimize the tax liability of the company.

[ Y ]

Yield

o         the rate of return on an investment.

[ W ]

Wasting assets

o         assets of a fixed nature but as they are being used by the business are physically diminishing in size eg a mine

Working capital

o         the total of current assets less the current liabilities

Work in progress

o         semi-finished goods