In a banking set-up, Integrated Treasury refers to integration of domestic and foreign exchange operations. A comprehensive strategy for funding the balance sheet and allocating capital across domestic, international, and foreign exchange markets is known an integrated treasury. With this strategy, the bank is able to maximize asset-liability management and take advantage of arbitrage opportunities. Prior to integration of two departments, these departments work independently without any communication between them.
Let’s consider a commercial bank that operates multiple branches and provides a wide range of financial services to its customers. Traditionally, each branch may have its own treasury function responsible for managing cash, liquidity, and risk associated with the branch’s operation.
However, the bank realizes that by integrating these
treasury functions, it can achieve better control over its financial resources,
enhance risk management and improve profitability. It decides to establish an
integrated treasury department at the bank’s headquarters to centralize and coordinate
these activities.
The integrated treasury department becomes responsible for managing the bank’s overall liquidity position, including monitoring cash flows, optimizing cash balances and, ensuring sufficient funds are available to meet operational and regulatory requirements. By consolidating cash management activities, the bank can minimize idle cash, optimize interest income, and efficiently allocate funds across different branches and business units.
Furthermore, The Integrated Treasury Departments oversees asset-liability management, which involves balancing the bank’s assets (loans, investments) and liabilities (deposits, borrowings) to optimize interest rate risk and maintain a healthy funding profile. By aligning the maturity and repricing characteristics of assets and liabilities, the bank can mitigate interest rate risk and improve net interest margins.
The integrated treasury setup also facilitates risk management within the bank. The department monitors and manages various risk, such as liquidity risk, market risk, credit risk, and operational risk. For example, it may implement risk mitigation strategies like hedging, diversification, and stress testing to protect the bank from adverse market conditions and ensure compliance with regulatory requirements.
Key components of an integrated treasury typically include:
Cash Management: This involves managing the organization’s cash flows, monitoring liquidity positions, forecasting cash requirements, and optimizing cash balances across various accounts and entities.
Liquidity Management: It focuses on maintaining adequate liquidity levels to meet operational and financial obligations. Integrated treasury systems help optimize cash pooling, intercompany lending, and cash concentration to maximize the utilization of available funds.
Risk Management: Integrated Treasury aims to identify, assess, and manage financial risks, such as foreign exchange risk, interest rate risk, credit risk, and market risk. It involves implementing hedging strategies, monitoring exposures and employing risk mitigation techniques.
Financial Planning: Integrated Treasury facilitates financial planning and budgeting processes by providing accurate and timely financial data. It helps align treasury strategies with overall organizational objectives and assists in capital allocation decisions.
Treasury Operations: This includes transaction processing, settlement, reconciliation, and reporting related to treasury activities. An integrated treasury system streamlines these operations through automation, integration with banking platforms and efficient reporting tools.
Implementing an integrated treasury approach offers
several benefits, including improved cash visibility, reduces costs, enhanced
risk management, better decision-making, and increased operational efficiency.
It also enables organizations to respond more effectively to market dynamics,
regulatory changes, and financial uncertainties.
By integrating these treasury functions, the bank benefits from improved efficiency, risk management and profitability. The consolidated approach allows for better coordination and decision-making across the bank’s treasury activities, enabling a holistic view of the bank’s financial position and risks. It also facilitates the implementation of standardized policies, procedures and controls throughout the organization.
It's worth noting that the specific implementation and structure of Integrated Treasury in a banking setup may vary depending on the size, complexity, and regulatory environment of the bank. The example provided above represents a general scenario, but banks may tailor their integrated treasury functions to suit their specific needs and strategic objectives.
There are several benefits associated with the implementation of a robust treasury management solution, that’s given below:
An integrated treasury serves as a hub for hedging and arbitrage activities. In order to maintain a proactive profit center, it aims to maximize its currency portfolio and allow for unrestricted transfers of BDT money between other currencies. Banks with integrated treasures will have the opportunity to develop multi-currency balance sheets and benefit from strategic positioning as a result of the incremental liberation of capital account convertibility.1. Reducing overall costs: With a central system that has complete and current information about company’s finances, anyone able to immediately see any costs associated with a payments and transactions. This makes the transfer of funds-e.g. for paying invoices-much quicker, easier, and in some cases, cheaper.
2. Treasury integration improves efficiency: By streamlining company’s financial obligations, one can manage absolutely everything from one single place. Treasury management solutions create efficiency by providing one place to do everything.
3. Automatic auditing system: Digital audits can automatically be generated within a treasury management system tool, and these can be used for the several different purposes, process and commercial decisions. Each time that one makes a payment, a treasury management system will generate useful analytical data including communication logs.
4. Reduce mistakes and errors: A digitized treasury process helps anyone cut out any guesswork involved, dramatically reducing the chance of human errors. Automatic payment authorization an routing, amongst other things, are just a few of the ways treasury management tools reduce mistakes.
5. A more efficient team: All in all, the amount of time that a treasury management tool saves one is one of the primary benefits. Over time, all this can add up every little help! Because treasury tends to be an understaffed part of any business, there’s not a huge shortage of value by using an automated treasury system instead of a full-time member of staff.