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 also be where the organization conducts most of its transactions. Several organizations use multiple banks but generally deal significantly with one bank (the concentration bank).

Understanding Concentration Bank

An example of a concentration bank can be a company that has multiple chain stores across the country, with each store depositing its cash into local banks. The company can set it up so that these funds are concentrated or deposited into one account, usually 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 also employ concentration accounts for fund transfers, private banking transactions, trust and custody accounts, and international transactions.

A concentration account allows for quick and easy account management because it is easy to transfer from and deposit money into a single account as opposed to having multiple accounts. But a concentration account comes with its own set of challenges.

U.S. authorities heavily scrutinize concentration accounts because they can be used for money laundering. It may be more difficult to follow a money trail if funds from disparate sources are combined in one central location. For example, a bank employee can deposit customer funds along with investment funds in one country and withdraw the same amount in another country. Because the funds were mixed, there is no way for the AML software to know where the source or destination of those funds.

The USA Patriot Act requires banks to establish clearer policies for detecting and reporting suspicious transactions and prohibited customers from moving their own funds into, out of, or through the concentration accounts.

Concentration Bank and Investment Management

A company with multiple branches may decide to place its funds in a concentration bank to facilitate investment management as well. An investment manager will aim to meet particular investment goals of the company (such as growth or increased liquidity) through a process that may involve asset allocation, financial statement analysis, stock selection, monitoring of existing investments, and plan implementation.

Investment management includes ensuring a company's tangible and intangible assets are maintained, accounted for, and well-utilized. The global investment management industry in 2019 was worth an estimated $89 trillion in assets under management, as measured by a Boston Consulting Group report in 2020.

Example of Concentration Banking

Suppose firm ABC is a multinational corporation with subsidiaries in five geographical regions within the United States. Initially, each subsidiary is responsible for managing its own finances. However, this practice produces wide imbalances in accounting. This is primarily because the performance of each subsidiary varies based on market conditions and team. Fund transfers between each of these branches are also a costly affair.

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, situated at the headquarters, is responsible for making investment decisions related to funds in this account. Fund transfers from subsidiaries to the parent institution are recorded as loans in accounting and returned, along with interest earned, by the parent entity to the subsidiary.