3. Agenda
What is a Treasury?
Functions of Treasury
Critical Risk Areas
Operations of a treasury
3
4. 4
• Banks help their customers manage their money, but
who manages a bank's money?
• How does a bank decide where to invest its capital
across its business and how much to hold back in
reserve?
• How does a bank make sure that each of its business
areas has enough cash to serve its clients and function
efficiently while keeping enough cash available centrally
at all times to cover any unexpected market
developments?
Have you ever thought upon?
6. What DoesTreasury Department Do in a Bank?
6
Asset Liability
Management
• The primary function of the treasury department of any banks is to ensure that its assets match its
liabilities in every possible way. It is the job of the treasury department to prepare various financial
models which help on forecasting the amount of net interest income that the bank stands to make if
different economic scenarios play out.
Products
• The Treasury offers customers risk coverage and investment solutions for the most simple to the
most complex products (structured products) and for all kinds of financial assets – generally fixed
income, interest rates, equities and exchange rates, and in some financial institutions, also
commodities.
Capital and Reserve
Requirements
• Since the treasury department is basically in charge of the bank’s balance sheet, it is also responsible
for setting aside reserves to meet the reserve requirements prescribed by the Central Bank i.e. RBI.
7. 7
Fund Raising / Investments
• Treasury departments keeps a close watch on the funding requirements and determine when additional cash is
needed and raise funds or allocate excess cash received to various types of investments, depending upon their rates
of return and how quickly they can be converted into cash.
Cash Forecasting
• The treasury department compiles information to create ongoing cash forecasts.
Risk Management
• The department uses various hedging and netting strategies to reduce risk related to changes in asset values, interest
rates and foreign currency holdings.
8. 8
Liquid Investments in
Government Securities
• Treasury departments at banks are also in charge of maintaining a certain portion of their portfolio in highly liquid
government securities. This lends safety to the bank’s portfolio while simultaneously creating a highly liquid market
for government securities.
Liasoning with Regulatory
Bodies
• The treasury department of banks is highly regulated. Since they are the ones that are supposed to maintain the
capital adequacy ratios and reserve ratios, they are also the ones that are supposed to liaise with regulatory agencies
on such issues. Executives from the treasury department are usually invited by the government when decisions
regarding the banking industry need to be made. Such executives also lobby on the industry’s behalf if adverse
regulations are put into place.
Disaster Management
• The treasury operations of any bank are responsible for managing its operations in the event of a disaster. Thus, to be
prepared for the same, the treasury department has to anticipate the risks that can materialize over time.
9. 9
Comprehensive Chart of Functions ofTreasury in a Bank
What does a
Treasury do?
Funding
Trade
Management
Finance /
Accounting
Cash
Management
Exposures + Cash
Management
Investments
Funding
Long term Borrowings
ST Borrowings
Cash Management
Liquidity and visibility
Forecasting
Exposures+ Risk
Management
Set policy
Identify exposures
Identify actions
Trade Management
Front office execution
Middle office controls
Limit, checks and balances
Finance/Accounting
Maintain books and records
Valuations
Investments
Optimize cash balance
Risk/return liquidity trade off
Limit, checks and balances
11. Major Risks
• Credit Risk
• Market Risk
• Operational
Risk
Other
Significant Risks
• Liquidity Risk
• Business Risk
• Reputational
Risk
Unrelated Risks
• Systematic
Risk
• Moral Hazard
Critical Risk Areas of Treasury in a Bank
11
12.
13. WhyTreasury Operations in Bank?
13
To Meet
Statutory
Requirements:
SLR
CRR
To raise
resources at
competitive
rates from
domestic and
Global Markets
To deposit
surplus funds
profitably
To remove asset
liability
mismatches
To hedge open
positions (for
mitigating
interest
rate/exchange
rate risks)
To benefit from
daily
fluctuations in
the financial
market through
trading activities
15. 1515
What is Blockchain?
• The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just
financial transactions but virtually everything of value.
Limitations of Existing
Model
• Current banking system largely based on SWIFT and its messaging system, which was invented in 1970’s.
• Using this system, which relies on one-way messaging, cross-border payments take 3-5 days on average to complete,
often fail, and are not transparent – the beneficiary does not know when the payment will arrive, or exactly how
much will be charged for its delivery and it’s very expensive too.
Impact of Blockchain
• An enterprise solution developed for Banks by Ripple, called xCurrent, uses a two-way messaging system between the
sending and receiving bank.
• When a payment is initiated, all of the information regarding that payment – including KYC data, bank fees,
and compliance information – is sent to the beneficiary bank BEFORE the payment is delivered.
• If any information is missing, the payment is halted and the sender can be notified that they need to
provide additional transaction detail.
• The primary benefit is a faster, more transparent, and more certain payment experience, is the improved ability to
manage global liquidity. Knowing exactly when a payment will reach a supplier, distributor, or manufacturer, as well
as the fees associated with each payment, can free up crucial liquidity, drive down the cost of doing business, and
increase treasury’s ability to maintain visibility and control over cash.
Asset Liability Management (ALM) can be defined as a mechanism to address the risk faced by a bank due to a mismatch between assets and liabilities either due to liquidity or changes in interest rates. Liquidity is an institution’s ability to meet its liabilities either by borrowing or converting assets. Apart from liquidity, a bank may also have a mismatch due to changes in interest rates as banks typically tend to borrow short term (fixed or floating) and lend long term (fixed or floating).