Chapter 7 - Relationship Management and FSP Selection Flashcards
Key Determinants for selecting the appropriate number of banking relationships
(1) firm’s current credit commitments and future credit needs: companies with larger credit asks may need to find a bank that can service all of their credit needs or may want to spread out the counterparty risk which will influence the appropriate # of banking relationships
(2) firm’s geographic footprint: MNCs may need multiple banking relationships to ensure appropriate product and service coverage in all countries in which they have presence; companies with complex, over the counter collection system may need to maintain relationships with a number of small local banks to ensure appropriate geographic coverage
(3) balance between cost of maintaining multiple relationships vs concentration risk aka single point of failure: despite additional complexity, maintaining a secondary banking relationships allows treasury to quickly shift accounts and services in case any problems arise with the primary bank
(4) relative strengths and capabilities of each bank: treasurers may adopt a ““best of breed”” approach where they select the a provider that is the best at each service (instead of a single provider that can provide all) which may lead to multiple banking relationships; there must be balance between access to the best functionality and a manageable number of providers / structure
Local regulation impact on Firm and FI relationships
- local regulation can impact relationships between firms and FI’s
- FI’s are often allowed to lend up to 25% of their capital base to any one non-related company
- legal lending limit is 15% in the US
Ways to manage foreign currency needs
(1) foreign currency account in home country if available / offered by its bank
(2) international account - foreign currency account domiciled in the country of that currency
Determinants for Firm’s Banking Structure - # of banks / location of banks
(1) types of collections and disbursements
(2) locations and currencies of investments and financing
(3) legal and tax regulations of the countries involved
Factors for pricing of bank loans
(1) cost of funds
(2) credit rating
(3) total loans committed and outstanding
(4) service fees
(5) deposit balances maintained
(6) range of other services used
(7) loan maturity
(8) revenue size and importance of overall relationship to the lending institution
(9) competition
Factors for pricing of cash management services
(1) transaction volumes
(2) customization
(3) exception-handling requirements
(4) cost of providing the service
(5) operational overhead
(6) deposit balances maintained including on balance sheet deposits
(7) value of other services used
(8) credit relationship
(9) revenue size and importance of overall relationship to the bank
Share of Wallet
the percentage of a company’s business that a bank has
- treasury personnel should consider asking specific banks which services they would like to provide as some banks have preferences in the products / services they provide
Demand Deposit Accounts (DDAs) aka current / checking accounts
- provides a store of value
- facilitate inter-company fund transfers or payments to vendors
- payment methods include: cash, check, debit card, internal book transfer, electronic transfer
- additional features include:
(1) accrual of interest: hard interest or earnings credit
(2) overdraft: occurs when items presented are in excess of the available balance in the account
- general practice is to incorporate an investment rate and a credit agreement to the DDA so positive balances are paid interest while negative balances result in automatic loan and interest charge - arrangement is not available in the US
(3) intraday overdrafts: daylight overdrafts; occurs when company initiate payments in amount excess of available balance with anticipation of receiving cash later in the same day; usually no fees on intraday OD
(4) virtual accounts: DDA can support a virtual account network underneath the DDA with the DDA remaining the legal account held by the company
Time Deposit Accounts (TDAs) aka noncurrent accounts
- deposits that are maintained at an FI for a specified period of time
- early withdrawal is only permitted with prior notification and may result in a penalty / fee
- examples include:
(1) Certificate of Deposit (CD): CD holder earns a fixed or variable interest rate over specified period of time
(2) Savings Account:
(i) a call account - allows depositors to withdraw funds at any time but it can’t make payments to third parties
(ii) a notice account - allows depositors to withdraw funds following a notice period or
(iii) a fixed account - only allows depositors to access the funds at the end of the term
Money Market Deposit Accounts (MMDA)
- allow firms to earn a competitive market rate of interest on cash balances
- balances are liquid and covered by deposit insurance
- may include a limit on the number of permitted transfers or pre-authorized withdrawals
- if transaction limit is exceeded, FI may impose fees to convert the account to a DDA
Non-Resident Accounts (NRA)
- may be either a current or non-current account
- account is held at a FI in a country different than the country where the entity legal HQ, residence, tax status reside
- common uses for NRAs include liquidity management and commercial collections / payments
Business Identification Code (BIC)
- specifies the FI or non-FI involved in the transaction - sometimes down to the branch level
- most commonly used BIC is the SWIFT code as it meets ISO standard 9362
- historically BIC stood for Bank Identification Code but now that SWIFT is open to non-banks, BIC now stands for Business Identification Code
SWIFT Code Structure
- SWIFT code consists of either 8 or 11 characters and is structured as follows:
(1) first 4 - business prefix (alpha only)
(2) next 2 - country code (alpha only)
(3) next 2 - business suffix (alphanumeric)
(4) next 3 - branch code (alphanumeric) – optional
- if there is only 8 characters, it typically refers to the primary office of a given business
- e.g. Federal Reserve Bank of NY is FRNYUS33 for primary office and FRNYUS33FX1 for its foreign exchange transactions
Routing Transit Number (RTN)
- 9 digit bank code used in the US to route checks and electronic transactions to the correct Fi
- US banks often have both a SWIFT BIC and an RTN
- Canadian banks use an 8 digit identifier - (1) first 3 digits specify bank and (2) last 5 specify branch
Universal Payment Identification Code (UPIC)
- allows US ACH payments to be credited to the right account without the need to publish account details on invoices
International Bank Account Number (IBAN)
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- used to identify banks across national borders
- adopted as an international standard by ISO and current standard is managed by SWIFT
- IBAN consists of 34 alphanumeric characters:
(1) first 2 - country code
(2) next 2 - check digits
(3) last 30 - country specific Basic Bank Account Number (BBAN) which consists of domestic bank account #, branch identifier, potential routing info
Article 4 of the Uniform Commercial Code (UCC)
- governs the relationship between banks and its customers and includes the rights, responsibilities, and definitions of the parties involved in the deposit and collection process
- Article 4 defines:
(1) when a bank can charge a customer’s account
(2) bank’s liability to the customer if it fails to honor a good check
(3) customer’s right to stop payment
(4) bank’s option not to pay an item more than 6 months old (stale-dated)
(5) customer’s duty to report any unauthorized signature or alterations; bank customer has duty to examine bank statements within reasonable time (not to exceed 30 days after statement becomes available) and to report any unauthorized signatures or alterations
Board Resolutions (Account Resolutions)
- account resolution passed by a firm’s BoD is the basic account or service authorization empowering a rep of the firm to enter into agreements for financial services
- resolution specifies the function that can be performed by specific individuals or job titles, people authorized to open and close accounts, and the entire scope / limitations of the relationship
- may be general or specific with regard to actions the FSP may take on behalf of the firm
- to simply documentation needed to manage an operating relationship, many FSPs use a master agreement that spells out overall operating requirements and authorizes the provider to operate on behalf of the firm signing the agreement
Signature Cards
- FSPs require firms to furnish signatures of authorized signers, which is called the signature card
- it is the client’s responsibility to maintain updated record of authorized signers and adopt controls to ensure only authorized individuals initiate and approve transactions
- company will want to ensure sufficient signers to ensure appropriate segregation of duties in event of absence (e.g. vacation, illness) but having too many signers creates operational risk as record of individual authorities need to be maintained
Service Agreements
- providers typically provide a standardized set of service agreements to companies when relationships are established and accounts are opened
- service agreements contracts / legal documents that describe the requirements and expectations of both the purchaser and provider of a specific service or services
- may be a master service agreement relating to the overall relationship and then separate service agreements for each specific service area
Elements of a Service Agreement
(1) contract length and adjustments
(2) info on funds availability
(3) time frames during which errors must be reported
(4) right of offset against accounts resulting from fees owed
(5) liability clauses defining responsibilities for specified risks
(6) other terms and conditions of the relationship
Incumbency Certificates (Certificates of Good Standing)
- depending on country(ies) where accounts are domiciled, provider may also require incumbency certificates
- these are documents that are used to confirm the identity of the signing officers of a corporation
Report of Foreign Bank and Financial Accounts (FBAR) requirements
- US persons / business must file an FBAR if the person had a financial interest in or signature authority over at least one account located outside of the US and the aggregate value of all financial accounts exceeded $10k at any time during the year
- general exception for corporate signers who are included in a consolidated FBAr filed by their company
- centralized record of authorized signers will help US companies comply with any FBAR filing requirements
Foreign Account Tax Compliance Act of 2010 (FATCA)
- implemented to address tax noncompliance by US taxpayers with foreign bank accounts
- act requires US taxpayers to file an annual report of all foreign financial accounts and offshore assets
- also requires foreign financial institutions to report financial accounts held by US taxpayers or by foreign entities that are substantially owned by US taxpayers
Service Level Agreements (SLA)
- defines specific services provided and the operating metrics used to measure the level of service provided and a description of penalties for failure to comply with the requirements of the agreement
- may be part of the service agreement or a separate document
- elements included are:
(1) operational policies and procedures - detailed processing requirements for each service, required info and reports, list of authorized individuals who can make changes and description of issue escalation and resolution process
(2) performance standards and calculations that define agreed-upon levels of service performance and quality
Financial Action Task Force (FATF)
- created to help adopt and implement measures designed to counter the use of the financial system by criminals, through anti-money laundering efforts
- role of FATF includes:
(1) monitoring members’ progress in implementing necessary AML measures
(2) reviews money laundering and terrorist financing techniques and countermeasures
(3) promotes adoption and implementation of appropriate measures globally
Money Laundering
- defined as any financial transaction which generates an asset or value as the result of an illegal act which may involve actions such as tax evasion or false accounting
- 3 stages to money laundering:
(1) placement: physical deposit of cash proceeds
(2) layering: series of financial transactions designed to separate cash proceeds from their criminal / terrorist origins
(3) integration: creating what appears to be a legitimate explanation for the source of funds
Bank Secrecy Act (BSA) 1970
- primary intent is to deter money laundering and use of secret foreign bank accounts
- requires all FIs to report any suspicious financial transactions so that a paper trail is created which can assist in detecting and monitoring illegal activities
- requires any trade or business organization that receives $10k+ in cash to file IRS Form 8300 identifying who they received the cash from and on whose behalf the transaction was conducted and to provide a description of the transaction and the method of payment
Money Laundering Control Act (MLCA) 1986
- enhances the BSA by making it a crime to strcutre transactions in a way to avoid the reporting requirement
- it defines money laundering and makes it a federal crime
- FI’s are liable for substantial civil and criminal penalties if they fail to comply with the reporting requirements of AML regulations
- requires FIs to (1) establish effective KYC guidelines (2) be aware of parties in high-value transfers (3) file currency transaction reports and criminal referrals
- specifically, FI’s must monitor and report the following activity if it’s inconsistent with customer’s business:
(i) attempts to avoid reporting or record-keeping requirements
(ii) unusual or multiple funds transfer activities
(iii) customers who provide insufficient or suspicious info
USA Patriot Act (2001) [Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act]
- designed to improve overall security; grants Fbi and DOJ increased latitude in intelligence gathering activities
- includes amendmentsto existing money laundering legislation with the intention to make it easier to prevent, detect, and prosecute international money laundering and the financing of terrorism
- provisions of the PATRIOT ACT include:
(1) imposed significant obligations on nonbank FI’s including broker-dealers, credit card companies, and check cashing services, also includes non-financial entities potentially handling high-value transactions such as car, boat, plane, adn jewelry dealers
(2) makes all foreign banks with accounts in the US subject to US jurisdiction
(3) prohibits US banks from maintaining, correspondent accounts for any foreign shell banks - foreign banks w/o physical presence in any country
(4) prevents US credit card system operators from authorizing foreign banks to issue or accept US credit cards without take steps to prevent terrorist use
(5) requires banks to KYC, due diligence customers before taking on new business
