The Roles and Responsibilities of Treasury

In my previous post titled (Treasures of Transformation ), I spoke about the gap in explaining the 'how' for Treasury. Given this is the path to unlock value for any financial institution, I will experiment through a series of posts, podcasts, and talks to share what forms a much-needed basis for this change.

In any financial institution, Treasury's primary role is to manage the balance sheet most optimally by increasing revenues (Net Interest Income) at lower costs while creating capital capacity within a wide set of constraints to maximize its P/L.

This is craftsmanship, done by understanding each balance sheet item, each revenue -, cost - and capital driver, each constraint and all their interdependencies in detail. This is no easy task, but data and technology become essential partners in achieving results better, faster and more seamlessly. I will come back to this later as it is a key pillar in any treasury transformation!

Treasury’s core responsibility is liquidity management; covering the disciplines of centralized cash management, collateral management and asset management, and funding and capital management. The disciplines are highly interdependent but each requires its own particular set of parameters and constraints to be managed for Treasury P/L and - risk to be optimized. Most important is to manage the liquidity risk as this is the most lethal risk any financial institution faces (i.e. running out of cash). Then interest rate risk, credit risk and funding/maturity gap risk. Regulation is of cause the imperative.

From a Treasury perspective the above areas are defined like this:

• Cash Management - The task of managing the institution's global cash flows across currencies, intraday as well as future projected, making sure that all payment obligations are settled and fulfilled.
• Collateral Management - The task of eliminating unnecessary credit risk between counterparties and clients by managing eligible collateral.
• Asset Management - The task of having the right, actual and regulatory liquidity buffers available and making the most P/L out of it.
• Funding - The task of always having enough cash available for the institution to serve its immediate obligations and other commitments and requirements on a longer horizon.
• Capital Management - The task of always having sufficient capital available to cover internal - and regulatory requirements, and having a capacity for business and revenue growth.

Each institution's risk appetite statement gives the above mandates and associated constraints. The risk appetite statement is a subjective and dynamic strategy defining the actual risk capacity and - appetite that the owners are willing to accept. It forms the basis for any action taken in a bank, also for Treasury.

Treasury is the custodian of those resources, and thus it is Treasury's role to intelligently link them to the client-side of the business by incentivizing the business to drive the right activities across client types, product types and jurisdictions. It is imperative for any financial institution to design, code and implement intelligent - and dynamic pricing models. It will be key to optimize value generation of the institution’s balance sheet.

These are the basic, overarching functions of a financial institution's Treasury department. Some institutions might even have a broader set of responsibilities than described here, but it is the above that holds the real Treasures of Transformation. My vision for those areas is what I personally define as a '‘Treasury as a Service’ (TaaS) concept, leveraging the megatrends of real-time, automation, and digital assets and - infrastructure. It is part of the broader Banking-as-a-Service (BaaS) and embedded finance trend that not only services its own internal needs but also can cater to others like providers, partners and clients.

Tune in to my next post (Measuring the Revenue Potential of Treasury in Automation and Real-Time) as I dive deeper into the actual, tangible drivers of revenue, cost and capital capacity inside Treasury.

Till then, Happy Reading and intriguing Reflections!