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Banking Essentials - Part I

This pathway will walk us through the basics of banks, starting with some of the different types and their main functions, then starting to look at the regulation faced by the banks, both before and after the Global Financial Crisis.

Greenwashing

Greenwashing is the act of distributing false information about something being more environmentally friendly than it actually is.

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Tackling the Cost of Living Crisis

In this video, Max discusses the cost-of-living crisis currently enveloping the UK. He examines its impact on households as well as the overall economy.

CSR and Sustainability in Financial Services

In the first video of this two-part video series, Elisa introduces us to sustainability. She begins by looking at the difference between sustainability and corporate social responsibility, two terms that can be easily confused.

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Role of Bank Treasury

Role of Bank Treasury

Chris Blake

Director

By the end of this video you will be able to evaluate the role of the treasury or ALM function and understand how it is described as “the bank within the bank”, alongside analysing the importance of asset and liability management in optimising the balance between risk and return. Finally, we will compare and contrast different organisational models of the treasury function

By the end of this video you will be able to evaluate the role of the treasury or ALM function and understand how it is described as “the bank within the bank”, alongside analysing the importance of asset and liability management in optimising the balance between risk and return. Finally, we will compare and contrast different organisational models of the treasury function

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Role of Bank Treasury

17 mins 23 secs

Key learning objectives:

  • Evaluate the role of the bank treasury or ALM function

  • Discuss how the function can be considered as “the bank within the bank”

  • Compare and contrast different organisational models that can be applied to the treasury function.

Overview:

This video considers the central role of a Treasury or ALM function in prudently managing a bank’s balance sheet whilst supporting management of financial returns.

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Summary

What is the difference between Treasury and ALM?

Unfortunately, there is no commonly agreed terminology. Most firms use the term "treasury" to cover all related activities associated with managing Liquidity and Funding, Capital, and Interest rate risk in the Banking Book (IRRBB), Funds Transfer Pricing and market-facing execution, alongside a huge range of possible reporting undertakings (both internal and regulatory) and hedge accounting.

What are the three lines of defense models in banks?

  • 1st Line - Risk Takinpg. Generally, those that deal in markets and take decisions with balance-sheet implications, also known as "Risk Owners", although slightly confusingly, they will also have responsibilities for risk management, so this area is better described as "control owners"
  • 2nd line- Risk Oversight. Those that have general oversight for risk positions versus limits or risk appetites, alongside writing policies and giving guidance on the appropriate definitions and procedures to implement policies.
  • 3rd line – Risk Assurance. Probably the simplest being internal audit

What does the treasury actually do?

  • Cash management - Treasury tracks day-to-day net cash flows, also known as cash management. This covers the settlement and squaring of nostro accounts, that is, the accounts banks have with other banks, alongside collateral movements and accounts with the Central Bank. It amounts to the ability to meet financial obligations.
  • Liquidity management - It includes Treasury buying a selection of securities that are likely to be near cash.
  • Funding management - It includes customer deposits and senior unsecured debt issuance raised in the wholesale market, both short-term and long-term.
  • Capital management - Bank capital must be proportional to the amount of risk it takes to ensure the bank’s continued solvency, both in business-as-usual and under extreme but plausible stress.
  • Recovery and resolution - This is a set of processes for understanding and planning for exceptional circumstances and the ability to react to this (recovery) or if the bank fails and the regulators need to take over (resolution).
  • Interest rate risk in the banking book - The essence of IRRBB is both to identify and net re-pricing opportunities and also manage the stability of the bank’s Net Interest Margin.
  • Funds transfer pricing - The process of efficiently pricing the internal price of money within the bank.

What is TLAC and MREL?

TLAC refers to Total Loss-Absorbing Capacity, which is the standard that requires the world’s largest banks, so-called Global Systemically Important Banks, or G-SIBs, to issue capital instruments that absorb losses and allow them to recapitalise while remaining going concerns.

MREL stands for Minimum Requirement for own funds and Eligible Liabilities. This is the EU’s version that requires banks to issue securities that absorb losses.

What are the main objectives of FTP?

  • Transfer interest-rate, liquidity and funding risks to the treasury at a rate that reflects the risk being assumed by the bank.
  • It also makes the liquidity buffer and funding costs transparent to business lines.

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Chris Blake

Chris Blake

Chris Blake holds a degree in Economics and Government from the London School of Economics. He is responsible for helping HSBC professionals understand balance sheet risk and return. He has previously worked as a risk specialist in ALM for the FSA. Prior to that, he worked as a money market and interest rate derivatives trader for Investec. Chris is also the Co-chair and Education Director of the UK Asset and Liability Management Association.

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