Treasury Terms Used in Relationship Management

by | Mar 3, 2016 | Updates | 0 comments

From Chapter 6 in Lewis Carroll’s The Looking Glass, we read the interchange between Alice and Humpty Dumpty. “When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.”

The deconstruction of language is a fun topic to debate…if you define and agree to your terms ahead of time. The definition of terms is useful in every discipline, and it seems right to provide a short definition of some of the relationship terms we will use…so you know what we mean when we use them. Here we go:

  • Scorecard. (Also known as the balanced scorecard.) The scorecard is one method a treasurer will use to measure the bank’s performance. Typically, it centers on several items: service level provided, quality of calls (ideas and support rendered), price vs. value, responsiveness and the like. Large corporations will usually provide a scorecard to their top tier bank relationships on a semi-annual or annual basis.
  • RAROC. Risk adjusted return on capital. This is a measurement that many banks use to evaluate the financial value of relationships. This determines the total revenue and margin on fee based services and deals. It is calibrated according to the risk level of the capital they have provided the firm. Thus, a lower margin on a financially strong firm might have a greater RAROC than a larger margin on a firm with an elevated risk level since they have capital at risk.
  • Hurdle Rate. Banks, when looking at their portfolio of clients, will often run their client profitability through a model (typically leveraging RAROC) and will identify a hurdle rate. For those firms that fall below this hurdle rate (of return) the bankers will be under pressure to get the relationship into a profitable zone.
  • Share of Wallet. Strategic Treasurer performs a Share of Wallet exercise for clients which categorizes all elements of each major bank relationship and ranks the share of spend that each bank enjoys. This is further calibrated by anticipated profit margin and RAROC with the expectation that this will provide a similar view of the relationship that the bank has of them with the added benefit of seeing their entire spend. This allows for some rebalancing, to ensure the most important bank relationships to the corporate stay important to the banks.
  • Account Analysis. An easier term would be the bank invoice for treasury services. This is the bill.
  • Earnings Credit Rate. In the US, some clever regulations were developed to prevent banks from paying interest on demand deposit accounts. But, some even sharper bankers found a way to compensate the companies that left balances at their banks…by using an earnings credit rate to offset some portion of the charges.

We’ll probably add some more terms to this list over time. But, this is a start.

Next Control Issue: Cash Management Fee Assessment

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