Global Trends in Bank Treasury Risk Management

Global Trends in Bank Treasury Risk Management

By Prof Moorad Choudhry

Bank Treasury departments are facing major challenges on multiple fronts, including need to meet regulatory requirements and managing the balance sheet in a truly efficient and optimised manner. We will highlight the main problems and present some recommendations on how a bank treasury should respond to these challenges. Ultimately Treasury departments have to implement “Strategic ALM“, which is the most effective way a bank can optimise its balance sheet.

What we will be focusing on

Basel III

Basel III is an international regulatory framework for banks which is a comprehensive set of reform measures. To handle the banking sector’s pressure arising from financial and economic stress, from wherever it may originate. It also aims at improving risk management and governance while strengthening bank’s transparency and disclosures.

Strategic ALM

Asset Liability Management refers to a mechanism to address the risk faced by a bank due to a mismatch between assets and liabilities either due to liquidity or changes in interest rates. It is a top down approach that be used to steer the mismatch from the neutral position so that the bank’s overall goals are met. The results from a strategic ALM applied to a simulation of the bank’s long term development, are used to find the short-term strategy that is best suited to achieve the long-term goals.

The practice up until the crash (of 2008) and even today the ALM Manager is a “reactive” person. Business lines structure the balance sheet; they make loans – lend money to customers, take in deposits and its different departments are doing that. This balance sheet is created by the front line manager, which is then taken by ALM for further management. Which is quite a reactive approach, ALM does not have a saying in what the balance sheet would look like today or how it should look like in a few years from now. Strategic ALM is a concept of being more proactive. The triangle of Finance-Risk-Treasury need to be more closely involved in what the balance sheet looks like from the origination stage onwards.

The type of lending you do, be it residential mortgages or project funding or trade finance is where you perfect the type of funding you have for the asset type.

Eg: You wouldn’t be using wholesale money market funding to fund project or infrastructure finance funding.

While in the treasury you first need to:

  • Meet the regulatory requirements
  • Optimize your own PnL
  • Maintain Customer franchise

Strategic ALM is the term introduced and explored further in the Certificate of Bank Treasury Risk Management with the aim of redefining the role of Asset Liability managers. As a treasury risk manager, you got to be more proactive in the way you optimize the balance sheet and have a high-level strategic discipline driven from the top down. Trained and experienced personnel are required to have genuine level of ALM discipline. With this aim, the 6-months long online course has been offered to bank treasury professionals and individuals who wish to build a strong and successful career in bank treasury.

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