Bank Relationship Management and Reviews

Why This Topic Matters
Banks are the single most important external partner of a corporate treasury. They hold the company's cash, execute its payments, extend its credit, and provide the systems that make daily liquidity management possible. The AFP CTP exam tests Bank Relationship Management because a treasurer who manages banks poorly will overpay for services, concentrate counterparty risk, lose access to credit at the worst moment, and weaken internal controls. On the exam, this topic appears in the Internal and External Relationships domain, and questions typically test whether you understand how to select, structure, monitor, review, and – when necessary – terminate banking relationships in a disciplined, documented way.

What Bank Relationship Management Is
Bank Relationship Management (BRM) is the formal process by which a company decides which banks to use, what services to buy from each, how to compensate them, how to evaluate their performance, and how to govern the relationship over time. It treats banks as strategic partners rather than vendors, recognizing that the relationship is two-sided: the company needs reliable services and credit, and the bank needs a profitable, predictable client. Good BRM balances three things:
• Cost – fees, balances, and spreads paid for services and credit.
• Service and capability – technology, geographic coverage, product depth, and responsiveness.
• Risk – counterparty (credit) risk of the bank, operational risk, and the strategic risk of over-reliance on one or two institutions.

Key Components of the Framework

1. Bank Selection and Rationalization
Companies typically use a request for proposal (RFP) or a less formal request for information (RFI) to select banks. Selection criteria include: credit quality (ratings), financial strength and capital adequacy, geographic footprint, product and technology capabilities, pricing, implementation support, relationship-management quality, and willingness to extend credit. Many firms periodically rationalize the number of banks and accounts to reduce complexity, idle balances, and control gaps, while still keeping enough banks to avoid concentration risk and preserve competitive tension.

2. Credit and Non-Credit Services – Share of Wallet
Banks earn most of their relationship profit from fee-based (non-credit) services such as cash management, trade finance, FX, and custody. Banks that commit capital to a revolving credit facility expect a fair share of wallet in return. Treasurers therefore allocate ancillary business among lending banks roughly in proportion to their credit commitments. Failure to do so can jeopardize credit availability or renewal terms. Exam questions often test this principle: credit is generally a loss leader that banks provide in exchange for other business.

3. Bank Compensation
Services are paid for in one of two ways, or a mix:
• Fees – explicit, transparent, tax-deductible, and unaffected by interest rates.
• Compensating balances – the company leaves non-interest-bearing (or low-earning) balances; the bank applies an earnings credit rate (ECR) to the average collected balance (after reserve requirements, where applicable) to generate an earnings credit that offsets fees.
Key formula: Earnings Credit = Average Collected Balance × (1 − Reserve Requirement) × ECR × (Days in Period / 365). Balances required to cover fees = Fees ÷ [ECR × (1 − RR) × (Days/365)]. When the ECR is below the company's alternative investment return, paying fees is cheaper; when the ECR is high relative to short-term rates, balances may be preferable. Remember also that earnings credits generally cannot be paid out in cash and that excess earnings credit is often lost (some banks allow limited carry-forward).

4. Account Analysis Statements
The account analysis statement is the bank's monthly invoice. It lists each service, volume, unit price, total charge, average ledger and collected balances, float, reserve requirement, ECR, earnings credit, and the net amount due or excess. In the U.S., the AFP Service Codes standardize service descriptions so treasurers can compare banks and automate reviews. In many other markets, banks use the TWIST BSB (Bank Services Billing) standard. Treasury should reconcile account analysis statements against negotiated pricing every month and dispute errors; studies consistently show billing errors are common.

5. Documentation and Controls
Core documents include account agreements, signature cards, account resolutions, service agreements (ACH, wire, positive pay, lockbox), credit agreements, and security procedures. Treasury must maintain an up-to-date inventory of all bank accounts and authorized signers, and promptly update authorities when employees leave. Under Know Your Customer (KYC) and anti-money-laundering rules, banks require beneficial ownership information and periodic re-certification; companies must be prepared to respond.

6. Relationship Governance
Effective relationships are governed through a bank relationship policy approved by senior management or the board that defines: minimum counterparty credit ratings, exposure limits per bank, criteria for opening and closing accounts, approval authorities, and review frequency. Treasury usually designates a relationship owner for each bank and holds regular meetings with the bank's relationship manager.

Bank Relationship Reviews

Purpose
A relationship review is a periodic, structured evaluation (typically annual, often semi-annual for major banks) of each bank's performance, pricing, and risk profile, and of the overall allocation of business across the bank group.

What Is Reviewed
• Service quality – error rates, timeliness, problem resolution, technology uptime, and quality of the relationship team. Many firms use scorecards or key performance indicators (KPIs) with service level agreements (SLAs).
• Pricing – comparison of actual charges on account analysis statements to the contract, and benchmarking against peers and market surveys.
• Share of wallet – whether fee business is being allocated fairly relative to credit commitments.
• Counterparty risk – changes in credit ratings, credit default swap spreads, capital ratios, regulatory actions, and news. Exposure includes deposits above insured limits, undrawn commitment reliance, derivative exposure, and investments.
• Strategic fit – does the bank still support the company's geographic expansion, currency needs, and technology roadmap?
• Compliance and documentation – are signers, resolutions, and KYC records current?

Outcomes
Reviews feed decisions to renegotiate pricing, reallocate business, consolidate or open accounts, issue an RFP, or exit a relationship. Exit should be managed carefully: credit facilities cannot be moved overnight, and operational transitions (payroll, lockbox, payments) require lead time and parallel testing.

Common Pitfalls Tested on the Exam
• Awarding all fee business to the lowest bidder without regard to credit providers.
• Relying on a single bank for both cash and credit, creating concentration risk.
• Failing to review account analysis statements, leaving pricing errors uncorrected.
• Not updating authorized signers after staff turnover.
• Treating the relationship only as a procurement exercise rather than a partnership.

Worked Example
A company pays $12,000 in monthly service charges. The bank's ECR is 2.0% and the reserve requirement is 0% (as is now common). Balances needed to cover fees for a 30-day month: 12,000 ÷ (0.02 × 30/365) = 12,000 ÷ 0.0016438 ≈ $7.3 million. If the company could invest that cash at 4.5% in money market funds, paying fees directly is cheaper. If the ECR were 5.0% while market rates were 4.5%, holding balances would be preferable (subject to counterparty exposure limits).

Exam Tips: Answering Questions on Bank Relationship Management and Reviews

Tip 1 – Think "partnership and reciprocity." When a scenario involves a bank that provides credit, the exam almost always expects you to recognize that fee-based business should be allocated to credit providers in proportion to their commitments. The best answer rarely rewards giving all business to the cheapest non-lending bank.

Tip 2 – Know the fees-versus-balances trade-off cold. Expect calculations using ECR, reserve requirement, and days in the period. Compare the ECR to the company's opportunity rate: if the opportunity rate exceeds the ECR, pay fees; if the ECR is higher, use balances. Remember earnings credit is not cash and excess is typically forfeited.

Tip 3 – Recognize the account analysis statement as the control tool. If a question asks how to detect overcharging or verify pricing, the answer is monthly review of account analysis statements using standardized service codes (AFP Service Codes in the U.S., TWIST BSB internationally).

Tip 4 – Separate the three dimensions. Many questions ask what a review should include or why a company might change banks. Sort the options into cost, service/capability, and risk. The most complete answer usually addresses counterparty risk alongside price and service.

Tip 5 – Counterparty risk belongs to the company, not just the bank. If a scenario mentions a bank's rating downgrade, widening CDS spreads, or regulatory trouble, the correct response involves reassessing exposure limits, diversifying deposits and credit commitments, and possibly reallocating business – not ignoring it because the bank is "too big to fail."

Tip 6 – Documentation and signatory control are governance issues. Questions about a departed employee who could still authorize payments test whether you recall that signature authorities and account resolutions must be updated promptly, and that a complete bank account inventory is a core control.

Tip 7 – RFP versus RFI. An RFI gathers general information and narrows the field; an RFP requests detailed, priced proposals against specified requirements. If a company has already defined its needs and wants binding pricing, the answer is RFP.

Tip 8 – Rationalization has limits. Consolidating banks and accounts reduces cost and complexity, but the exam expects you to recognize the need to maintain enough relationships to preserve credit capacity, competitive pricing, and continuity if one bank fails.

Tip 9 – Watch for "best" and "first" wording. When asked for the first step in a review or a bank change, prefer answers about defining requirements, assessing current performance, or reviewing the policy before contacting new banks. When asked for the best long-term approach, prefer structured, policy-driven, periodic reviews over ad hoc reactions.

Tip 10 – Eliminate extremes. Distractors often propose moving all business to one bank, never changing banks, or ignoring relationship banks for pricing alone. The CTP favors balanced, documented, risk-aware answers that reflect a long-term partnership managed through formal periodic reviews.

Summary
Bank Relationship Management is the disciplined selection, compensation, monitoring, and periodic review of a company's banks to secure reliable services and credit at a fair cost with controlled risk. Master the share-of-wallet principle, the fee-versus-balance calculation, the role of the account analysis statement, the components of a formal review (service, price, share of wallet, counterparty risk, strategic fit, documentation), and the governance policies that tie them together, and you will be well prepared for exam questions in this area.