Learning Objectives:

• Define the treasury function and its strategic role within a bank.

• Understand the organisational structure of a bank’s treasury department.

• Identify the key objectives and responsibilities of treasury management.

• Explain the governance framework and reporting lines for treasury operations.

1.1 The Role of Treasury in Banking

The treasury function is responsible for managing a bank’s liquidity, funding, capital, and financial risks. As the University of Nottingham’s Treasury section notes, the treasury’s responsibilities include cash management, investments, relationship management, financing, and risk management . The Hong Kong Securities and Investment Institute’s Bank Treasury Management programme defines treasury as a critical function that requires understanding “the structural elements of a bank’s balance sheet, the sources of a bank’s profits, and a bank’s assets and liabilities” .

Key Treasury Functions:

• Liquidity Management: Ensuring the bank has sufficient liquid assets to meet obligations as they fall due.

• Funding Management: Securing cost-effective funding for the bank’s operations.

• Capital Management: Managing the bank’s capital position to meet regulatory requirements.

• Interest Rate and Currency Risk Management: Hedging exposures to interest rate and currency movements.

• Investment Management: Managing the bank’s investment portfolio.

• Relationship Management: Building relationships with a portfolio of finance providers to obtain the best possible service at the best possible rate .

1.2 The Strategic Role of Treasury

The treasury function plays a strategic role in a bank’s overall performance. The National Open University of Nigeria’s treasury management course describes bank treasury management as an exercise in portfolio management: “A bank’s balance sheet can be seen as a large portfolio of investments. To determine how a portfolio is invested, the bank’s governing body will not only need underlying research, but also detailed information on the positions within this portfolio” .

Key Strategic Objectives:

• Balance Sheet Optimisation: Managing the bank’s balance sheet to maximise returns while controlling risk.

• Asset-Liability Management: Ensuring that the bank’s assets and liabilities are managed in a coordinated manner.

• Profit Centre Role: Treasury functions as a profit centre for the bank, generating revenue through dealing and investment activities.

• Risk Management: Ensuring the bank’s general risk appetite relating to balance sheet exposure is implemented and adequately controlled .

1.3 Organisational Structure of the Treasury Department

The ICAI’s Certificate Course on Treasury and Investment Management outlines a comprehensive organisational structure for bank treasury departments . The treasury function is typically structured into three distinct areas:

Front Office:

The front office of the treasury has a responsibility to manage investment and market risks in accordance with instructions received from the bank’s ALCO. This is undertaken through the Dealing Room which acts as the bank’s interface to international and domestic financial markets .

Front Office Functions:

• Optimisation of risk return through specialisation and management.

• Funding of the Balance Sheet at optimum prices.

• Proposing interest rate matrix to the ALCO.

• Proposing various investment options to the ALCO.

• Analysing various economic trends and proposing Balance Sheet Strategy to the ALCO.

• Quotation of various foreign exchange and interest rates to customers.

• Dealing in foreign exchange for position covering as well as for own account trading.

• Various funding activities through various derivatives.

• Providing structured treasury solutions to customers.

• Marketing activities for future business growth.

• Estimating daily P&L and working with reporting unit in resolving any difference .

Mid-Office:

Mid-office is responsible for onsite risk measurement, monitoring and management reporting .

Mid-Office Functions:

• Limit setting and monitoring exposures in relation to limits.

• Assessing likely market movements based on internal assessments and external/internal research.

• Evolving hedging strategies for assets and liabilities.

• Interacting with the bank’s Risk Management Department on liquidity and market risk.

• Monitoring open currency positions.

• Calculating and reporting Value at Risk (VaR).

• Stress testing and back testing of investment and trading portfolios.

• Risk-return analysis.

• Marking open positions to market to assess unrealised gain and losses .

Back-Office:

The key functions of back-office are administrative and operational in nature .

Back-Office Functions:

• Deal slip verification.

• Generation and dispatch of interbank confirmations.

• Monitoring receipt of confirmations from counterparty banks.

• Monitoring receipt of confirmations of forward contracts and derivatives.

• Effecting/receiving payments.

• Settlement through central clearing systems or direct through Nostro, RTGS as applicable.

• Monitoring receipt of forex funds in interbank contracts.

• Statutory reports to regulators.

• Management of Nostro Funds to advise latest funds position.

• Reconciliation of Nostro/Vostro Other accounts.

• Monitoring approved exposure and position limits.

• Accounting .

1.4 Governance and Delegation of Powers

The treasury function requires clear governance structures and delegation of powers. “Delegation of powers should be consistent with the market requirements and risks. Head of Treasury (Treasury Manager) could be given adequate powers to enable him to take on-the-spot decisions” . The treasury manager oversees the work of the Chief Dealer, Head of Research, and Head of Back Office and is solely in charge of managing funds, investments, and forex activity .

ALCO Governance:

The treasury manager is typically a member of the Asset-Liability Management Committee (ALCO) and helps the committee in deciding various policies in the matter of treasury management . The senior committee will set the general business strategy of the bank, the mix of activities and risk parameters for the execution of these activities . In larger organisations, the more detailed formulation of these will have been delegated to sub-committees, such as the ALCO .