The Changing Role of a Bank's Treasury

This study investigates the contemporary challenges faced by banks’ treasuries and shows how the treasury function is being transformed across the banking sector. Using a comprehensive sample of international surveys of banks representing both the emerging and advanced markets, we analyse current and future (stressed) macro-conditions affecting financial institutions to assess the expected reaction of banks’ treasuries to events of tighter credit and liquidity, and we document that the main problem boils down to the risk of interest rates hikes, followed by disruptions in the FX and money markets. In search of revenue diversification, banks turn to trading for the wealth management; trading for the corporate customers; structured derivatives; and revising balance sheet management. We report that banks are considering establishing a secondary market for their products in order to launch new revenue sources, and eventually become market makers. This paper also argues that Basel III capital for interest rates on the banking book rule and liquidity requirements constitute primary concerns and obstacles for banks’ treasuries. Finally, the paper advises banks on the optimal treasury strategies along with the necessary steps that should be considered during the implementation of the new treasury roles.

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