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Role

The primary role of the treasury in banks is to ensure that there is sufficient cash at all times to meet the operational needs of the business. They tread a fine line between managing capital and risk.

Responsibilities

Treasuries are responsible for cash forecasting, working capital management, cash management, investment management, treasury risk management and fund-raising.

If the banking entity has an investment banking unit, then the treasury also participates in foreign exchange, loans and deposits, debt securities, commodity products, and their derivative instruments on behalf of the bank and the bank's clients.

(1) Balance sheet management refers to the process of determining the size and composition of the bank's assets and liabilities to achieve (or exceed) capital adequacy requirements and other financial ratios.

Treasury aids balance sheet management by fund-raising and proprietary trading.

(2) Basel III introduced 2 ratios - Liquidity coverage ratio (LCR) and Net Stable Funding Ratio (NSFR). Both ratios are significant for treasury operations because it is up to the treasury to ensure the ratios are met on a daily basis.

(3) Liquidity risk management is concerned with the risk of having insufficient funds to meet a sudden large-scale demand for funds from depositors or sudden draw downs from clients. Treasury helps balance maximize the value of assets with keeping enough cash and cash equivalents to service demands on the liabilities side.

(4) Pre-settlement/ settlement risk is managed by the treasury by ensuring that it knows the identity of the counterparties it deals with, determining there is sufficient credit limit available for the counterparty before entering into any contract, being careful in dealing with overly complicated and large transactions and using payment systems that are based on internationally accepted standards and practices.

(5) Interest-rate risk which arises when there is a maturity date mismatch between assets and liabilities is managed by the treasury by devising trading strategies which can be put into effect at the appropriate time, with financial instruments such as interest rates swaps.

(6) Foreign exchange exposure such as economic and transaction exposure are managed by the treasury by hedging, to reduce the future volatility of cashflows that are subject to foreign exchange rate movement. Accounting exposures, which arise from periodic balance sheet re-measurement, resulting in unrealized gains and losses can't be hedged.

Controls and measures

The essence of internal controls is to make sure that the person initiating and completing any action does not control the recording of the said action e.g. trading should be separate from confirmations, approval of trades should be separate from reconciling of those trades, custody of securities should be separate from those responsible for accounting.

(1) Trading limits such as position limits, stop loss limits and value-at-risk (VaR) limits are put in place so that the bank is not exposed to specific market risks at levels that exceed what the board and senior management have authorized.

(2) Monitoring and controlling of deals is achieved by the back office by examining, verifying, reconciling trades in real or near-real time; middle office by monitoring the risk exposure of dealers, business units and the financial institute as a whole; and senior managers by using the aforesaid information to track mistakes and omissions in deals, identify possible settlement errors, and detect any possible fraud.

(3) Audit and compliance checks is conducted by auditors (unlike the back office and senior managers conducting the day-to-day monitoring) who are able to see the broader picture and can spent more time analyzing procedures and transactions towards the goal of verifying compliance with bank policies and determining efficiency and effectiveness.

(4) Conflicts of interest can arise for e.g. when traders are allowed to trade from their own personal account, resulting in an insider trading risk or there is a material connection between a broker and the trader. These can be managed with full disclosure and transparency requirements.