How much is corporate cash-pooling worth? Modelling and simulation

Berlinger, Edina and Bihary, Zsolt and Walter, György (2016) How much is corporate cash-pooling worth? Modelling and simulation. Working Paper. Corvinus University of Budapest Faculty of Economics.

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The paper analyzes a special corporate banking product, the so called cash-pool, which gained remarkable popularity in the recent years as firms try to centralize and manage their liquidity more efficiently. The novelty of this paper is the formalization of a valuation model which can serve as a basis for a Monte Carlo simulation to assess the most important benefits of the firms arising from the pooling of their cash holdings. The literature emphasizes several benefits of cash-pooling such as interest rate savings, economy of scale and reduced cash-flow volatility. The presented model focuses on the interest rate savings complemented with a new aspect: the reduced counterparty risk toward the bank. The main conclusion of the analysis is that the value of a cash-pool is higher in case of firms with large, diverse and volatile cash-flows having less access to the capital markets especially if the partner bank is risky and offers a high interest spread. It is also shown that cash-pooling is not the privilege of large multinational firms any more as the initial direct costs can be easily regained within a year even in the case of SMEs.

Item Type:Monograph (Working Paper)
Series Name:Corvinus Economics Working Papers - CEWP
Series Number / Identification Number:2016/05
Uncontrolled Keywords:corporate cash management, banking transaction services, cash-pool, Monte-Carlo simulation, net interest spread, counterparty risk
JEL classification:G15 - International Financial Markets
G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
ID Code:2207
Deposited By: Ádám Hoffmann
Deposited On:28 Jan 2016 12:52
Last Modified:28 Jan 2016 12:52

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