Bank overlay structure definition

What is a Bank Overlay Structure?

When a company operates in multiple countries, it may have difficulty reconciling its use of local banking partners (with whom it may have had relations for many years) with the need to run a cash concentration system that efficiently funnels its cash into investment instruments. A possible solution to this conundrum is the bank overlay structure.

The Levels in a Bank Overlay Structure

There are two levels in a bank overlay structure. The bottom layer contains the in-country banks that are used to deal with local cash transactions, such as cash receipts from locally-generated invoices to customers. The top layer is comprised of a group of regional banks that are networked together, or perhaps even a single superbank that operates at a global level. This top layer of banks maintains a separate bank account for each country in which the company does business, or for each legal entity owned by the parent company. The cash balances in the accounts located in the bottom layer of banks are routinely shifted into the accounts maintained by the top layer of banks. These cash sweeps may be conducted with manual transfers, or perhaps with standard authorizations issued to the local banks, or via SWIFT messages from the top-layer banks.

Under this arrangement, the bulk of all banking transactions are conducted in the bottom layer of banks, with occasional cash sweeps shifting funds to and from the top layer of banks.

Advantages of the Bank Overlay Structure

The advantages of a bank overlay structure are as follows:

  • Cash consolidation. It is a useful tool for consolidating cash at a regional level, and perhaps even at a global level, thereby allowing for the centralized management of cash. By centralizing cash management, you can more easily invest it to maximize returns, while still retaining sufficient cash to deal with your operating needs.

  • Enhanced liquidity management. A bank overlay structure provides a comprehensive view of all cash balances across the organization, enabling better decision-making. It helps to ensure that surplus funds from one account or subsidiary can be used to cover deficits in another, reducing the need for external borrowing.

  • Cost efficiency. By pooling funds, companies can minimize the need for short-term borrowing and overdrafts.

  • Improved control. A bank overlay structure gives the central treasury or finance team greater control over cash flows and transactions.

  • Improved investment returns. Pooled funds create a larger aggregate balance, allowing a company to negotiate better returns on surplus cash investments. It also ensures that excess cash isn’t left unutilized in accounts where it earns little or no interest.

  • Supports multi-currency operations. A bank overlay structure enables the centralized management of foreign exchange risks through pooling and netting strategies.

By leveraging a bank overlay structure, businesses can optimize their cash management processes, reduce costs, and improve their overall financial efficiency. It is especially beneficial for companies operating in multiple jurisdictions or with complex organizational structures.

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