In a banking setup, the function of an integrated treasury typically provides:
a) Reserve management and investment:
i) Fulfilling
CRR/SLR commitments:
ii) Assembling
a roughly balanced investment portfolio to maximize yield and duration.
b) Liquidity and Fund Management: It
involves:
i)
Providing a
balanced and well-diversified liabilities base to fund the various assets on the
bank’s balance sheet.
ii)
Analyzing major
cash flows resulting from asset-liability transactions.
iii)
Providing policy
inputs to 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 pricing 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 flow 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 is 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 of 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 swaps 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 last 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 connected 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 exposures that might not be necessary for
ordinary banking.
By performing these functions and integrated treasury in a banking setup aims to optimize the management of financial resources, enhance risk management practices, ensure regulatory compliance and contribute to the overall profitability and stability of the bank.