A bank reference, also known as a banker’s reference, is a statement from a bank regarding one of its customers, saying whether he or she is able to meet a specific financial commitment. Within financial intuitions it is known as a status inquiry.
The term should not be confused with the bank reference rate, which is an interest rate upon which an interest rate swap or floating-rate security is based.
In most countries, the customer’s permission is required before a bank reference is requested or sent.
A supplier who is trying to decide whether to agree to credit terms for a new customer will usually ask for a bank reference.
References need to be interpreted according to how much praise is included or omitted, because banks will not go into much detail if the customer is unreliable.
The bank will charge a fee for sending the reference, which is typically paid for by the business or individual making the inquiry.
The bank will warn the inquirer not to rely solely on the reference when making a decision. The institution will use standard phrases such as ‘respectable and good for your figures’, ‘capital/resources fully employed,’ or ‘customer not known to us for long.’
Any reply that does not include a phrase such as ‘good for your figures’ is usually taken as a warning. A stronger warning sign is if the word ‘respectable’ does not appear in the letter. Bank references never contain specific information or advice, such as ‘don’t trust this guy’ or ‘he is totally unreliable.’
Don’t rely just on a bank reference
If you are deciding whether to offer a new customer credit (and how much), you should widen your search to perhaps other suppliers, a credit rating agency, and/or their accountants. To do this, you should get the customer’s permission first.
If you are a landlord, and the bank reference for a prospective tenant suggests he or she is not a suitable risk for the financial commitment, one option is to request a larger deposit.
In many advanced economies the inquirer will instruct his or her own bank to ask the third party’s bank for a reference.
According to Collins Dictionary, a banker’s reference is:
“A confidential statement about the financial status of a customer, provided by one bank to another, or to an authorized enquirer.”