Concentration Bank

What Is a Concentration Bank?

A concentration bank is a financial institution that is the primary bank of a specific organization. A concentration bank may likewise be where the organization manages the greater part of its transactions. Several organizations utilize numerous banks however generally deal essentially with one bank (the concentration bank).

Understanding Concentration Bank

An illustration of a concentration bank can be a company that has various chain stores across the country, with each store depositing its cash into nearby banks. The company can set it up so these funds are gathered or deposited into one account, typically called a concentration account.

A concentration account is a deposit account that aggregates funds from several locations (e.g., from the national company's many branches) into one centralized account. Banks may likewise utilize concentration accounts for fund transfers, private banking transactions, trust and custody accounts, and international transactions.

A concentration account considers quick and simple account management since it is not difficult to transfer from and deposit money into a single account rather than having different accounts. Be that as it may, a concentration account accompanies its own set of difficulties.

U.S. specialists intensely examine concentration accounts since they can be utilized for money laundering. It could be more challenging to follow a money trail in the event that funds from different sources are combined in one central location. For instance, a bank employee can deposit customer funds alongside investment funds in a single country and pull out a similar amount in another country. Since the funds were mixed, it is absolutely impossible for the AML software to know where the source or objective of those funds.

The USA Patriot Act expects banks to lay out clearer policies for distinguishing and reporting suspicious transactions and denied customers from moving their own funds into, out of, or through the concentration accounts.

Concentration Bank and Investment Management

A company with various branches might choose to place its funds in a concentration bank to work with investment management too. An investment manager will aim to meet specific investment objectives of the company (like growth or increased liquidity) through a cycle that might include asset allocation, financial statement analysis, stock selection, monitoring of existing investments, and plan implementation.

Investment management incorporates guaranteeing a company's substantial and theoretical assets are kept up with, accounted for, and very much used. The global investment management industry in 2019 was worth an estimated $89 trillion in assets under management, as estimated by a Boston Consulting Group report in 2020.

Illustration of Concentration Banking

Assume firm ABC is a multinational corporation with auxiliaries in five geographical districts inside the United States. Initially, every subsidiary is responsible for dealing with its own finances. Notwithstanding, this practice delivers wide uneven characters in accounting. This is essentially in light of the fact that the performance of every subsidiary fluctuates in view of market conditions and team. Fund transfers between every one of these branches are likewise an expensive undertaking.

To streamline operations, ABC sets up a concentration banking system in which branches transfer a certain portion of their earnings into a central bank operation. An investment manager, arranged at the headquarters, is responsible for pursuing investment choices connected with funds in this account. Fund transfers from auxiliaries to the parent institution are recorded as loans in accounting and returned, alongside interest earned, by the parent entity to the subsidiary.

Features

• Concentration banking is generally practiced by large multinational organizations with several auxiliaries and locations.
• Concentration accounts aggregate funds from several locations into a centralized account and are generally employed by banks to work with fund transfers, private banking transactions, trust and custody accounts, and international transactions.
• A concentration bank is a financial institution what capabilities as a primary bank of a specific organization.