Chapter 7 - Relationship Management and Financial Service Provider Selection Flashcards
Legal Lending Limit
Maximum amount that can be loaned to a given customer
Typically 25% or 15% in the US
More sophisticated methods of measuring relationship profitability on the part of FSPs has lead to what?
Lower costs for a firm purchasing multiple services
DDA
Store of value when receiving deposits and a vehicle to facilitate payments
Are DDAs interest bearing in many countries?
Yes
Instead of interest, DDAs in the US are usually subject to the ___________?
Earnings allowance credit
What do many countries in the world do as it relates to overdraft availability on DDAs?
Negotiate an investment rate and a credit rate when overdrafts occur
This is part of setting up the borrowing arrangement ahead of time
Savings Account Types
*Call
*Notice
*Fixed
Call – similar to DDA but can’t make third party payments
Notice – notice period
Fixed – only at the end of a specific term
Are MMDAs covered by FDIC insurance?
Yes
Nonresident Account
Accounts held at an FI in a given country by an entity that is located outside that country
Characters 7 & 8 in a BIC Code represent what (xxxxxxXX)?
Business party suffix
UPIC
Universal Payment Identification Code
Used for ACH payment to be credited without giving out actual bank details
Who manages the formats of IBANs?
SWIFT
Banking relationships in the US are governed by what set of agreed upon rules and practices?
UCC Article 4
30 days to reconcile a statement
Many FSPs will use a __________ to reduce documentation needed to maintain an operating relationship
Master agreement
Right of offset is usually covered in what type of document related to banking relationships?
Service agreement
Which act enhanced reporting requirements for FBAR in 2010?
FATCA (Foreign Account Tax Compliance Act)
FATF
Financial Action Task Force
Spearheaded the efforts to reduce use of banking services for criminal use
AML
Money Laundering’s Three Stages
Placement – physical deposit of cash from illegal proceeds
Layering – series of financial transactions designed to separate cash proceeds
Integration – creating what appears to be a legitimate transaction
BSA
Bank Secrecy Act of 1970
AML legislation
Deter money laundering and use of secret foreign accounts
$10,000 requires Form 8300
Form 8300
Required to be filed as part of BSA
MLCA
Money Laundering Control Act
Enhances BSA by making it a crime to purposefully structure transactions to avoid the reporting threshold
USA PATRIOT Act (2001)
Gave the FBI and DOJ increased latitude in intelligence-gathering activities
Imposes significant obligations on nonbank FIs
Includes nonfinancial entities with high-value transactions
All foreign banks in the US are subject to US jurisdiction
Prohibits US banks from maintaining foreign shell banks
Credit card issuers that are foreign must take steps to prevent usage by terrorists
Increased KYC requirements
FinCEN’s CDD Rule (2018)
Customer Due Diligence
Requires identification of beneficial owners
25% or more or have control
Following which standard is genearlly the best approach for working through KYC documents with a bank?
Use the FATF standards
CIPs
Customer identification programs
Efforts to know and understand customers initially and on an ongoing basis
Two Most Common FSP Performance Measurement Techniques
Scorecards
Relationship Reviews
Scorecards
Quantitatively and qualitatively measure an FSP’s performance
Primary purpose is to provide feedback on the service provided and benefit received
Bank Compensation
How the bank earns money from providing services
TWIST
Transition Workflow Innovation Standards Team
Developed ISO 20022 camt.086 messages
AFP Global Service Codes
Works with camt.086 and ASC X12 822
Covered globally
Banks got around Regulation Q by doing what to compensate balances held?
Utilizing the earnings credit
Value Dating
Reduces available balances, which reduces interest earned on the account
Bank doesn’t have to pay interest on positive balances or earns interest charged on negative balances
Instead of value dating, US banks achieve similar results using ___________ and ____________
Availability
&
as-of adjustments
ECA
Earnings Credit Analysis
ECR
Earnings Credit Rate
ASC X12 822
Standardized format for reporting account analysis statements electronically
ASC
(Organization)
Accredited Standards Committee
Subset of ANSI
ANSI
American National Standards Institute
Average ledger balance calculations are net of any __________________
Current period adjustments
Can US Reserve Banks pay interest following Dodd Frank?
Yes
Is the reserve requirement negotiable?
Yes, especially since the bank will receive interest income
Deposit Fees
(Bank Analysis)
Previously shown as FDIC fees
2012 FDIC requested to rename as fees weren’t paid directly to FDIC
Deposit fees are usually calculated on which balance?
Full ledger balance
Available or Investable Balance
Average collected balance minus the reserve requirement
Represents amount bank was able to invest
Fees vs. Balance Compensation
(Thought process for Treasurers)
Treasurers must decide whether to compensate banks by paying fees or by negotiating lower fees for higher balances
May be more advantageous sometimes to gain ECR compared to short-term investment rates
Are earnings credits taxable?
No
What typically happens if the earnings credit is above the total bank fees?
Excess earnings credits are lost
Some hybrid accounts allow it to be paid out as interest
Bank Rationale for Fees vs. Balance Compensation
Fees: increase liabilities with deposits and fees are low-risk source of income
Balance Compensation: may be used to fund loans and investments
Service Charge Categories
Review Only
Implementation
Maintenance
Account Services
Transaction Processing
Information Delivery
Technology
If MMDAs terms regarding limits of transfers are violated, what might the bank do?
Impose fees
Convert the account to a DDA
What is the importance of requiring a standard currency when performing the annual relationship review with a bank?
Comparability
Most well-designed templates will be setup this way
RFP
Request for Proposal
Outlines firm’s objectives, needs, and service requirements
RFI
Request for Information
Asks selected providers to submit general information
RFQ
Request for Quotation
Invite providers to bid on specific products or services
Best used when products and services are standardized
Two Basic Elements of the RFP
The substance of the required products and/or services
Form in which the RFP will be delivered (comparability)
What is important to remember when managing multiple vendors in an RFP process as it relates to questions?
Transparency
Share the question and answer with the entire pool
Counterparty Risk
Risk that a counterparty in a contract will not be able to meet its contractual obligations
SOC 1
Systems and Organization Controls
Covered under SSAE 18
SSAE 18 equivalent for international standards
ISAE No. 3402
Primary benefit of utilizing a service auditor and their report for SOC 1 engagements?
The FSP doesn’t have to be visited by multiple user auditors
Bank Monitoring Tools
(What can outsiders reference to review?)
Financial Statements
Credit Analysis
Regulator Assessments
How do banks calculate their losses related to loans under US GAAP and IFRS standards?
New rules require them to be calculated as the expected credit loss over the life of the loan
UBPR
Uniform Bank Performance Report
Primary publicly available tools for assessing the general financial risk of a US Bank
Helpful in assessing in comparison to peers
Who is the UBPR published by?
FFIEC
Federal Financial Institutions Examination Council
UBPRs display what types of data?
Data for the specific bank
Data for a peer group
Percentile rankings
Sovereign Risk
Risk that government may default on its debt
Political Risk
Risk that a government may take actions that negatively impact a firm’s operations and/or value
Nationalization
Government takeover of one or more companies
Compensation is usually far less than the current market value, if any is paid
Blocked Currencies
Profits cannot be converted from the local currency into a major trading currency
Forced Reinvestment
Funds cannot be transferred out of the country in any form, or it is limited
Required Majority Ownership
Firms must be owned by resident nationals
GDPR
General Data Protection Regulation
Applies to EU citizens and transferring data outside EEA
Red Flags Rule / FACT Act of 2003
US regulations that require FIs and creditors to develop and implement written identity theft prevention programs
US Foreign Corrupt Practices Act of 1977 (FCPA)
Forbids US firms from engaging in the practice of “greasing the wheels” payments
Expropriation
A government takeover of property, with or without compensation
Which act established FBAR?
BSA (1970)
For bank analysis statements, do all banks use standardized terminology?
No
AFP Codes and ASC X12 822 are designed to better standardize, but differences still exist
Bank Concentration Risk
Risk that there will be a single point of failure for banking services
What is the best approach for implementing complex and/or global systems?
Test new practices and procedures in one area before they are rolled out company-wide
Three Tasks for treasury to complete before designing and administering the RFP?
Define the Objective
Determine the Business Requirements
Develop the Project Plan
Tools available to help companies monitor the financial health of banks
Published Financial Statements
Credit Analysis
Regulator’s Assessments
