Association for Financial Professionals (AFP) Practice Exam

Which of the following is NOT an important consideration when determining the number of banks in a company’s banking network?

1. Importance of diversification of funds

2. Risk of having a "single point of failure"

3. Cost to maintain each bank relationship

4. Existence of multi-country operations

The correct answer is: Importance of diversification of funds

The correct answer highlights a factor that, while relevant in the banking context, is not directly tied to the number of banks a company should include in its banking network. Diversification of funds is a crucial consideration for any treasury function, as it can mitigate financial risks and safeguard against economic downturns. However, when specifically assessing the number of bank relationships, the focus tends to be more on operational risk management and efficiency rather than merely diversifying funds. The importance of understanding the risk of a "single point of failure" emphasizes that relying on a limited number of banks can expose the company to significant operational risks. If one bank fails or faces difficulties, it could endanger the company's financial health, making it critical to assess how many banks to engage based on this risk. Additionally, the cost to maintain each bank relationship is a practical consideration that affects how many banks a company can feasibly manage. Each banking relationship has associated costs, including fees, resource allocation, and time spent managing these accounts. Lastly, for companies operating in multiple countries, it becomes essential to consider how their banking network supports international operations. Different regulations, currencies, and local banking practices can dictate the necessity of having multiple banking relationships across various jurisdictions. In summary, while diversification of funds is