Interest Enhancement
- 01:09
Understand why a bank may apply additional interest for cash trapped in a certain geography
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Transcript
Let's run through how a bank may provide additional interest to a corporate for cash that is trapped in a certain geography. As we have already mentioned, this is just a way for a corporate to obtain a beneficial or an a bonus rate of interest on cash basis held in jurisdictions where regulatory requirements make it difficult to move your cash outta that country. So clearly, due to the difficulty of moving the cash out of the country and there is no physical movement of the cash, the yield is just enhanced. So as the cash cannot be moved out of the country to a single financial center to then be part of the optimized pool, what we do is converted back to the base currency of the pool, and that is how value is obtained. So the core balance in the restricted currency accrues interest at the standard or preferential daily rate and is passed as normal, and that interest is settled at a local level. So with optimized interest, we get rid of the spread between debit and credit interest. However, with enhanced interest, the spread between debit and credit interest rates still applies for multinational corporates that are generating income in countries where cash is restricted. For example, Brazil, India, many parts of Africa. This can be of great value and extra benefit to the pool.