Treasury Operations and Banking Relations Flashcards

A company negotiates a compensating balance arrangement with its bank. What is the primary purpose of this arrangement?

Answer: To offset bank service fees by maintaining a minimum deposit balance

Compensating balances are minimum deposit levels a company maintains to offset the cost of banking services or credit facilities.

Which type of bank account allows a company to issue checks up to a predetermined credit limit even with a zero balance?

Answer: Controlled Disbursement Account

Controlled disbursement accounts are linked to a master account; the bank reports check presentments early each morning so the company can fund only the exact amount needed.

A treasury manager wants to consolidate balances from multiple subsidiary accounts into one master account daily. Which structure best achieves this?

Answer: Physical cash pooling (ZBA structure)

Physical cash pooling with Zero Balance Accounts (ZBAs) automatically sweeps subsidiary balances to or from a master account to maintain zero balances in subsidiary accounts.

What is the key advantage of notional pooling compared to physical pooling for a multinational corporation?

Answer: Interest is calculated on the net combined balance without actual fund transfers

Notional pooling offsets debit and credit balances across accounts mathematically, so interest is calculated on the net position without requiring physical fund transfers.

In evaluating bank performance under an Account Analysis Statement, what does 'earnings credit rate' (ECR) represent?

Answer: The rate applied to average collected balances to generate earnings credits offsetting service charges

The ECR is applied to average investable balances to calculate earnings credits, which are then used to offset the bank's service charges on the account analysis statement.

A company's bank account analysis shows excess earnings credits. What is the standard treatment of these excess credits?

Answer: They are forfeited and cannot be carried over

Excess earnings credits typically cannot be carried forward and are forfeited, which is why companies aim to match balances to exactly offset service charges.

Which banking service provides a company with early morning notification of checks presented for payment, enabling same-day funding decisions?

Answer: Controlled Disbursement

Controlled disbursement accounts report all checks presented for payment early in the morning, giving the treasury team time to fund exactly the right amount that day.