The major functions of integrated treasury are:
(a) Reserve Management and Investment: It involves:
(i)
Fulfilling CRR/SLR commitments
(ii) Assembling a
roughly balanced investment portfolio to
maximize yield
and duration
(b) Liquidity and Funds Management:
It involves:
(i) Providing
a balanced and well-diversified liability base
to fund
the various
assets on the
bank's
balance sheet;
(ii) Analyzing major cash flows resulting from asset-liability transactions; and
(iii)
Providing policy inputs to the bank's strategic planning group on funding mix (currency,
tenor, and cost) and yield expected in credit and
investment.
(c)
Asset Liability Management: ALM calls for determining
the
optimal size
and growth rate of the balance sheet and
also price the assets and liabilities in accordance with prescribed guidelines.
(d) Risk Management: Integrated treasury
manages all market risks associated with a bank‘s liabilities
and assets. The market risk
of liabilities pertains
to floating interest rate risks and asset and liability mismatches.Market risk for assets can arise from:
(i) Negative adjustment to interest rates
(ii) Increasing levels of disintermediation,
(iii) Securitization of assets, and
(iv) Emergence
of credit derivatives, etc.
The Treasury would observe the cash inflow impact of changes in asset prices
due to changes in interest
rates by adhering
to prudential exposure
limitations while the Credit Department would continue to be in charge of assessing credit risk.
(e) Transfer Pricing: The
treasury is responsible for making sure that the bank's money are used as
efficiently as possible without sacrificing yield or liquidity. An integrated treasury unit has direct access to numerous markets as well as knowledge of the bank's overall funding requirements (like money market, capital market, forex market, credit market). In order to inform
different industry groups and product categories on the best business strategy to employ, the treasury
should ideally give benchmark rates after taking on market risk.
(f) Derivative Products: For the purpose of hedging
a bank's own exposures, the Treasury can create Interest Rate Swap
(IRS) and other currency-based/cross-currency derivative products. It can
also
offer these products to
clients
or other banks.
(g)
Arbitrage:In order to maximize
profit with the least amount of risk, Treasury units
of
banks engage in
arbitrage by simultaneously purchasing and selling the same type of asset in two marketplaces.
(h) Capital Adequacy: This function is concerned with the quality of the assets,
and Return on Assets
(ROA) is a crucial metric for gauging
the
effectiveness of the funds that have been allocated. One of the main profit centers is an
integrated treasury. Its own Profit and Loss measurements exist.Through
proprietary trading, which involves transactions made to profit from changes in market interest and currency rates, it takes on
exposures that might not be necessary for ordinary banking.