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Treasury Management for Bankers

The treasury function of an organization administers, monitors, and manages its sources and uses of funds to achieve business objectives and optimal profitability. For a large commercial bank, the key financial risks that must be measured and managed by the treasury include interest rate risk, liquidity risk, foreign exchange risk, investment risk, capital risk, and operational risk. At a job interview for a treasury position, an applicant should discuss that a treasury operation trades financial instruments for profit, provides pricing to clients and internal divisions, and maintains dealing relationships with large corporate clients across foreign exchange, debt, and interest rate markets. A treasury management policy set by a bank's board should cover issues like risk management, investment guidelines, and

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TACN-4TC-19ACN Nguyen Thu Hien
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178 views2 pages

Treasury Management for Bankers

The treasury function of an organization administers, monitors, and manages its sources and uses of funds to achieve business objectives and optimal profitability. For a large commercial bank, the key financial risks that must be measured and managed by the treasury include interest rate risk, liquidity risk, foreign exchange risk, investment risk, capital risk, and operational risk. At a job interview for a treasury position, an applicant should discuss that a treasury operation trades financial instruments for profit, provides pricing to clients and internal divisions, and maintains dealing relationships with large corporate clients across foreign exchange, debt, and interest rate markets. A treasury management policy set by a bank's board should cover issues like risk management, investment guidelines, and

Uploaded by

TACN-4TC-19ACN Nguyen Thu Hien
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Tutorial 1 - Introduction to Treasury Management

1. Briefly describe the role of treasury within an organization.


•The treasury function will administer, monitor and manage the sources of funds and uses of
funds that pass through an organisation
•It is responsible for the flow of funds through an institution which results in the achievement
of planned business objectives and optimal levels of profitability

2. List and briefly explain the financial risks that need to be measured and
managed by
the treasury operation of a large commercial bank.
ASSET AND LIABILITY MANAGEMENT
- MAIN RISKS -
interest rate
• liquidity
• foreign exchange
• investment
• capital
• operational
major risks for banks include credit, operational, market, and liquidity risk Credit risk is the
biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual
obligations. An example is when borrowers default on a principal or interest payment of a
loan. Defaults can occur on mortgages, credit cards, and fixed income securities. Failure to
meet obligational contracts can also occur in areas such
as derivatives and guarantees provided
Operational risk is the risk of loss due to errors, interruptions, or damages caused by people,
systems, or processes
Market risk mostly occurs from a bank’s activities in capital markets. It is due to the
unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks
are more exposed if they are heavily involved in investing in capital markets or sales and
trading.
Liquidity risk refers to the ability of a bank to access cash to meet funding obligations.
Obligations include allowing customers to take out their deposits
3. You are a graduate of Monash University and have applied for a position with
Mega
Bank in their treasury division. At the job interview you are asked to discuss your
understanding of the scope of a treasury operation.
List the scope of a treasury operation in point form, and explain each point using
examples.
“Treasury” has had various meanings over the years – in the context of Foreign Exchange
markets it referred to the division within a bank that :
-trades in foreign exchange markets for the purposes of making a profit for the bank
(“proprietory trading”) maintains foreign exchange dealing relationships with the bank’s
large corporate and financial institution clients
-Provides foreign exchange derivative instruments for the bank’s internal divisions as well as
its external clients
- Quotes prices in a range of physical and derivative foreign exchange instruments (“price
making”) These functions are now performed by what would now be referred to as bank’s
“Foreign Exchange” division

“Treasury” has also referred to the division within a bank that trades debt instruments (eg
bank bills, commercial paper, bonds and interest rate swaps) for purposes of making a profit
for the bank (“proprietory trading”)
- or to provide pricing of these instruments for the banks clients and internal divisions
(“pricing making”)
- maintains interest rate-related dealing relationships with the banks large corporate clients
These functions are performed by what would now be referred to as bank’s “Capital
Markets” division

4. You are a consultant appointed by the board of directors of a large commercial


bank
and are ask to report on issues that should be included in a proposed treasury
management policy document.
List in point form the issues you consider the board should cover in the policy
document. (Note: while you are only required to list the main points at this time,
you should understand them sufficiently to explain each point in detail should the
board seek further information in the future)
5. Discuss the relationship between ALCO and the treasury operation of an
organization.

 Asset-liability committees (ALCOs) are responsible for overseeing the management


of a company or bank's assets and liabilities.
 An ALCO at the board or management level provides important management
information systems (MIS) and oversight for effectively evaluating on- and off-
balance-sheet risk for an institution.
 An ALCO's strategies, policies, and procedures should relate to the board’s goals,
objectives, and risk tolerances for operating standards.
 One of the ALCO’s goals is ensuring adequate liquidity while managing the bank’s
spread between the interest income and interest expense.

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