Rethinking the treasury operating model

Traditionally, the corporate treasury function in a bank (often simply referred to as “treasury”) is responsible for managing interest rate risk, maturity mismatch, and capital and funding strategy for the bank. The recent global financial crisis (GFC) highlighted deficiencies in the treasury operating model and functional capabilities to effectively manage capital, funding, liquidity, leverage and investments in a crisis scenario. Further, risk management and internal audit primarily focused on the Pillar 1 risks, and provided limited oversight on treasury risks (market risk in the banking book, counterparty credit risk, and funding and liquidity risk). In the aftermath of the GFC, corporate treasury is faced with a challenging market and regulatory environment characterized by low interest rates and margin compression, increasing divergence between lending and deposit growth rates, decline in availability of intraday credit from custody and clearing banks, increase in cash and high quality liquid asset (HQLA) holdings, increase in collateral requirements for derivatives and securities financing, constraints on short-term wholesale funding (STWF) dependency, and heightened prudential standards. The centralized treasury funding model is being challenged with increasing constraints on the mobility of capital, funding, liquidity and collateral across legal entities and jurisdictions. In response, the size of the corporate treasury function at global banks has increased dramatically, and banks are making significant investments in corporate treasury data and IT infrastructure. To ensure that the target state corporate treasury is effective and efficient, and that the investments are channeled toward a well-defined and coherent strategic vision, global banks will need to rethink the treasury operating model. This article highlights the key challenges facing corporate treasury, and the key considerations in redesigning a “best in class” treasury operating model.