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 main advantage of the bank overlay structure is that 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.