INTERNATIONAL BANKING AND FINANCE

TREASURY OPERATIONS OF BANKS AND

CORPORATE

SUBMITTED BY:

AYESHA ANAND - 15010324269

BBA-LLB

Division – C

Symbiosis Law School, Hyderabad

Symbiosis International University, Pune

In

MARCH, 2019

UNDER THE GUIDANCE OF:

PROF. A CHANDRASEKHAR

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 CERTIFICATE

The Project entitled “Treasury operations of banks and corporate”

submitted to the Symbiosis Law School, Hyderabad for Constitutional Law as part of
Internal assessment is based on my original work carried out under the guidance of Prof.
A Chandrasekhar. The research work has not been submitted elsewhere for award of
any degree. The material borrowed from other sources and incorporated in the thesis has
been duly acknowledged. I understand that I could be held responsible and accountable
for plagiarism, if any, detected later on.

Signature of the Candidate:

AYESHA ANAND:

Date: 26th March 2019

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 ACKNOWLEDGEMENT

I would like to take this opportunity to thank all the people who have helped me in the
completion of this project.
Firstly, I express my sincere gratitude towards my Guide Prof. A Chandrasekhar who
has helped me at every step, provided me with relevant study material for the project,
rectified my mistakes, and always guided me in my research. This project would not have
been possible without his help and guidance. Also for being accessible for any kind of
help during my project work. I also sincerely thank the library staff for co-operation and
assistance during my research. Finally, I am extremely thankful to Symbiosis Law School
for providing me with this opportunity of doing this project.

AYESHA ANAND - 269

Semester: VIII

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 ABSTRACT

Treasury basically refers to all activities involving the management of revenues, inflow
and outflow of governments, banks and corporate. Which is why it is said that treasury
is a special term within a compass of the broader term finance. In this paper the major
focus is on the treasury operations in the banking sector and the corporate sector. The
paper starts with in introduction so as to what treasury exactly is and what is its
importance in different sectors and/or fields. After which firstly to corporate’s treasury
is dealt with and then later the bank’s treasury operations respectively. It gives a
detailed study of what treasury is in both, how it is important, which also makes it very
different from each other. What exactly are the functions in both i.e. the bank and the
corporate has also be dealt with. The other issues and topics that are covered in
continuation of the above mentioned include the stages and steps involved in it; where
corporate treasury is located and what are its responsibilities further on; what the
treasury department does in a bank; how it works with all other parts of the banks;
what are front office back office and mid office activities and so on. The paper also
deals with the functions of it and the functional areas of the same.

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 INTRODUCTION

Treasury is the treasure or the valuables of the government, centre and states and
extended to semi-government bodies, corporate and non-corporate bodies, and
financial institutions including banks that operate this treasury. Treasury management
therefore refers to all activities involving the management of revenues, inflow and
outflow of governments, banks and corporate. Treasury is a special term within a
compass of the broader term finance. Bank treasury activities encompass not just cash
management, but also short-term borrowing and investment in a variety of liquid debt
market instruments. The treasury function funds the ongoing capital requirements of
the institution, at the lowest possible cost, within reserve parameters set by regulatory
and supervisory authorities. Historically, high returns at global banks have meant that
investment management was not a particularly high priority within treasury operations.
However as global interest rates have fallen, reflecting the economic prospect of
continued low growth and low inflation, increased competition has reduced traditional
intermediation margins. This prospective lower profit growth has caused a re-
evaluation of the available returns from assets such as the underlying deposit base.
Any surplus liquidity had, historically at least, been invested in a somewhat arbitrary
manner via a spread of short-term government securities; the elimination of exposure
to counter-party risk, as opposed to volatility, was the paramount investment criteria.
Corporate treasurers, not always versed in modern portfolio theory, were often
presented with volatile cash balances for short term investment purposes. The basic
requirement for banking institutions to maintain these substantial cash reserves stems
from their essential economic function, arising from daily liquidity requirements of
their clients. At an aggregate level, this entails net cheque clearing, either in favour of,
or contrary to, an individual depository organisation - in turn affecting its overall net
financial position. Collateral requirements for securities firms, including both tier
capital ratios and liquidity reserves, have already been extensively reviewed in the
banking literature; see Dimson and Marsh (1995). In an intermediary context these
proprietary positions require the construction of properly diversified portfolios of low
credit risk, high-quality, liquid assets across a plethora of divergent currencies.
Performance must be monitored against an internal funding or benchmark interest-rate,

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reflecting the real costs associated with any investment. If you were to ask what a
corporate treasurer was back in 1970s, most people would not have an answer. Fast
forward today, the corporate Treasury has evolved and has taken on a life of its own.
From banks to institutions to corporations, it is almost quintessential to find a Treasury
department in these setups now as compared to during the 1990s. Post the Great
Financial Crisis in 2008, today Corporate Treasurers are gaining more importance and
visibility in the Boardrooms.

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 CORPORATE TREASURY

What is a Corporate Treasury?

It is relatively easy to identify the Human Resource (HR) Department and define its
roles and responsibilities to matters related to HR. And usually, the definition does not
change much from organization to organization. However, for the Corporate Treasury,
sometimes it might not be that straightforward – the roles and responsibilities of one
Treasury department might differ from another setup in a different organization. In
general, the Corporate Treasury manages the organization’s liquidity risks, financial
risks, banking relationships, working capital and supporting management and business
units. In some organizations, the Treasury department might also include the mergers
and acquisitions team, corporate finance, corporate planning, pension fund
management, economic analysis and fintech. 1

What is the Typical Setup of a Corporate Treasury?

The Corporate Treasury department can cover a large area of responsibilities and
arguably is becoming an important part of any organisation. In current years, the
Treasurer is gaining more recognition in the board rooms with Treasury advice being
more sought after by senior management. Treasury topics ranging from standard issues
in Working Capital, FX risks, Funding costs to complex issues in Tax, Banking
relationships, Fintech are now gaining notice from senior management. Depending on
the level of requirements and needs of each organization, the sophistication and size of
the Treasury department can vary. 2 There are many articles written on the different
stages of a Treasury setup in relation to its roles, organization, growth path, value. In
our opinion, we can classify the stages as follows,

Standard – Transactional focused with Basic Coverage in Products and Geography.

Advanced – Strategic thinking with Regional Coverage staffed with Treasury

specialists.

1
www.investing.com
2
Ibid

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 Leader – Sophisticated management with Global Coverage and Well Developed Teams
in different functions that can rival the Banks.

Below is a good summary that shows the different stages of the Treasury, and how
corporate treasuries at different stages can add value to organizations.

Stage 1: Shorten working capital cycle, optimizing cost of borrowing, ensuring

liquidity across business value chain.

Stage 2: Improve business margins, risk management and mitigation through hedging

Stage 3: Unlock liquidity from idle cash, reduce cost of financing across value chain,
i.e. channels and vendors, structuring M&A transactions

Stage 4: Enhance shareholder value through dividend and share buy backs, manage
cost of capital through banking and credit rating relationships 3

What are the Main Functions of the Treasury Department?

Most Treasury setups will cover the following functions,

Cash and Liquidity Management

Financial Risks Management (FX, Interest Rates, Commodities, etc)

Working Capital Management

Long Term Funding

Bank Relationship

Management and Business Units Support

Tax and Treasury Accounting

Company Credit Rating Management

3
www.rbi.org.in

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 Company Capital Structure

Based on a 2014 survey done by PWC, the functions of financial risk management,
cash and liquidity management and funding rank as the most important roles of a
corporate treasury in large organisations. For small organisations, supporting
management and business units, maintaining bank relationships and financial risk
4
management rank as the most important for a corporate treasury.

Where is the Corporate Treasury usually Located?

It is common to find the Corporate Treasury located at the Head Office of the
organization. And, depending on their size and geographical presence, corporate
treasuries may also locate their regional or country Treasury offices around different
parts of the world. Usually, these regional or country offices will be responsible for
Treasury issues in their geographical areas. It is possible to find certain setups
performing specific functions regardless of geographical boundaries. There are many
reasons and considerations when choosing the location to setup a Corporate Treasury
office.5 The notable factors are,

Geographical proximity to operations

Tax incentives and benefits

Maturity of financial and capital markets

Availability of skilled treasury staff

Regulatory environment and Political stability

Increasingly, on top of business related concerns, factors like quality of life, healthy
living conditions and even clean air are some of the reasons affecting the choice of the
location in setting up Corporate Treasury offices. There are a couple of well-known
cities that are attracting Corporate Treasury offices, Asia – Hong Kong,
Singapore, Shanghai Europe – London, Amsterdam, Dublin, Luxembourg

4
Ibid
5
www.researchgate.net

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 Corporate Treasurers Should Have Mandates from Senior Management on
Treasury Matters

In most setups, the Corporate Treasury falls under the Finance Group in the
organization with the Treasurer reporting to the CFO. The organizational structure
does vary in some setups but usually the Corporate Treasury is closely related to the
Finance arm. Most Treasurers have mandates from their senior management and for
treasury specific matters:

Cash and Liquidity Management

Financial Risks Management

Banking Relationship Management

Funding and Debt Management

Proprietary Trading Limits

With the mandates, Treasurers will be required to present and report to senior
management on a regular basis. The reports can range from a macro overview to
detailed metrics in several key Treasury areas. In some Treasury setups with
proprietary trading mandates, daily reports with live trading positions and up to date
performances are delivered to their respective management. 6

Treasury Policies and Governance Will Define How Treasury Activities are
Carried Out

Based on the mandates, Treasurers will need to formulate a set of Corporate Treasury
policies for the organization on,

Bank Relationships Management (Counterparty Limits, Cash Bank, Wallet Sharing)

Financial Risks Management (FX, Interest Rates, Commodity Risks)

Cash and Liquidity Management (Cashpool, In-House Bank, Internal Dealing)

6
www.rbi.org.in

10 | P a g e
Debt and Credit Ratings (Debt Ratios, Credit Ratings, Public Relationships)

Proprietary Trading (Profit Targets, Loss Limits, Trading Products)

Operational and Settlements Standard Operating Procedures

Depending on the organization and its setup, the list of policies can be more than
above. Treasury policies should:

Reflect the Corporate Treasury’s mandate

Show the reporting and responsibility structure

Explain the Treasury’s definition on different Treasury risks

Outline the risk management methodologies and risk monitoring processes (i.e FX
exposures, Cashflow reports, Counterparty limits, Debt monitoring)

Specify clearly the different risk management limits (i.e FX limits, Interest Rate
coverage, Debt ratios, Trading limits, Cash end of day balances, Settlement cut -offs)

Include standard operating procedures guidelines on different risk management

processes

Corporate Treasurers need to have a robust framework on risks monitoring and setup to
ensure timely reporting and alert escalation. Depending on the level of sophistication
and organizational needs, normally such tasks fall under the Treasury Risk
Controllers/Analysts desks. We tend to call them the middle office, their roles are
to identify, measure and monitor the different Treasury risks metrics on a regular basis.
The middle office will also ensure that the Treasury dealers, traders or managers act
within their mandates and assigned trading limits. Usually, such monitoring reports are
distributed to the Treasury team along with the senior management. So far, we have
painted a high level overview on the roles, setups, policies and mandates in the
industry. Let us now zoom in on the specific areas of responsibilities of the corporate

11 | P a g e
 treasurer, discussing about the expectations and common issues faced by corporate
treasurers. 7

5 Common Responsibilities of Corporate Treasurers in any Organization

It is difficult and not possible to identify and define a set of standard responsibilities
for Corporate Treasurers, as there are many factors that will shape the responsibilities
of the Treasurer. i.e organization size, setup, sophistication, location, industry, etc.
However, from the numerous surveys, we can identify a few common areas and
summarise the common responsibilities of the Corporate Treasurer in most
organizations. 8

Responsibility 1: Working Capital, Cash & Liquidity Management

When Treasurers are asked to list their most important tasks, the usual topics listed are,

Enhance Liquidity Risk Management

Optimize Working Capital

Improve Cash Flow Forecasting and Visibility of Cash

Improve Cash Conversion Cycle

Optimize Inventory Levels

Cash is king. Working capital, cash and liquidity management ranks as one of the most
important tasks of a treasurer. Ensuring the organization’s liquidity and smooth cash
flow is of paramount importance for corporate treasury. As Richard Branson
emphasizes, “Never take your eyes off the cash flow because it is the life blood of the
business.” Every business needs cash for their operating, financing, investing and other
functions. And it is one of the most basic roles for a Treasurer to be able to,

Know and Measure the Current Cash Balances

7
Ibid
8
www.investing.com

12 | P a g e
 Ensure Liquidity for Daily Operations

Accurately Forecast the Future Cash flows

Deploy Efficient Cash Management Setups

Enhance Yields on Excess Cash Balances

In order to optimize the working capital, the Treasurer must be able to evaluate and
manage the size of the inventory levels. Depending on the type of business, Inventory
can be in the form of actual physical finished goods like boxes of biscuits to semi -
finished stocks like vehicle parts awaiting full assembly. 9 Other factors like payment
terms, supplier finance and logistics chain management do affect working capital.And
normally, Treasurers are expected to manage or give advice on these too.

Responsibility 2: Financial Markets Risks Management

Financial Markets Risks are,

Foreign Exchange Risks from Volatility in currency prices – when the organization is
exposed to numerous currencies due to cross border trade flows, income and liabilities
i.e FMCG, Export/Import businesses.

Interest Rates Risks from Volatility in interest rates – when the organization relies on
external borrowing and funding i.e Infrastructure, Asset Heavy industries.

Commodities Risks from Volatility in commodities prices – when the organization is

dependent or engaged in commodities related businesses i.e Airlines, Commodities
trading houses.

Equity Risks from Volatility in stock prices – when the organization manages its
pension funds, engages in stock buyback.

Market Liquidity Risks from availability of Liquidity in the market – universal risks
affecting all organisations across different asset classes.

9
www.igidr.ac.in

13 | P a g e
It is important not to confuse Financial Markets Risks with Enterprise Risks.

Financial Markets Risks arise from the usage of instruments traded in Financial
Markets, while Enterprise Risks originate from factors outside Financial Markets, i.e
reputation risks (loss of consumer confidence), legal risks (infringement of copyrights),
operational risks (fraud, payment failure).

Responsibility 3: Mid and Long Term Funding (Periods More Than 1 Year)

Funding & Capital Management, Corporate Finance, Asset Liability Management

(ALM) or Debt Capital Market are common names for the department responsible for
funding in different organisations. There are instances where the funding team might
be reporting to the Group CFO instead of the Group Treasurer. In general, funding is
one of the most important responsibilities of the Treasurer and quite often attracts close
attention from the Senior Management. Mid and Long term funding should not be
confused with Cash and Liquidity management, though in theory, they can refer to the
similar areas and scope. In most setups, Cash and Liquidity are more short term in
nature – up to 1 year, while Mid and Long Term funding tend to look further – often
for periods more than 1 year. The skills and knowledge required in the two
departments differs, usually more in-depth understanding and specialist capabilities are
required for the latter. i.e legal knowledge, loan clauses, bonds issuance, country
regulations, tax matters, etc. The common Funding targets for a Treasurer are,

Ensure proper and adequate capital and funding

Efficient and sound capital structure

Reduction in borrowing and funding costs

Diversification of funding sources

Responsibility 4: Treasury Risks Controls & Operations

As the organization grows and its business expands, the level of complexity tends to
increase as well. The normal Finance and Accounting reports are not designed and not

14 | P a g e
comprehensive to capture and evaluate Treasury Risks. It is crucial and essential for
any organization to have a set of robust procedures and good reporting system to data
mine, generate reports and analyze Treasury Risks. Depending on the sophistication
and size of the setups, it might be a dedicated department solely tasked for Risks
Control to a responsibility assigned to Treasury staff who is managing other duties. As
for Treasury Operations, in recent years, it is popular to outsource such “back office”
functions to shared service centres or even external service providers. Such
outsourcing or centralization of operational roles allows organisations to benefit from
economies of scale, eliminate duplicate functions and headcounts in different locations.
This frees up resources and time for the Treasury departments to focus on strategic
issues and undertake more value adding work. Depending on the organization, such
share service centres might be reporting to other departments instead of the Treasurer.
And in smaller organisations, it might not be economical to have such a centralised
setup. In such situation, the Treasury Operations might be sitting within the Treasury
Department or in some cases are outsourced to the Finance Department. With the
advancement of technology and increasing innovations in disruptive Fintech, Treasury
Operations might be digitalized or replaced by artificial intelligence or systems.
Although, there are no known wide scale implementations or digitalization of human
operations with systems, we are witnessing an increment of interests and exploration
into possible options. The Banking industry has already started replacing some
operations with robots or systems.

Responsibility 5: Treasury Systems & Data Analytics

Treasury Management Systems (TMS) are gaining more acceptance and

recognition for their value and efficiency among corporate treasuries. In the past, such
systems are normally used in Banks and large corporate treasuries as the
implementation costs were prohibitive and access were constrained by technical
capabilities. Now with the advancement in internet connectivity, cloud solutions and
huge decrease in setup costs, it is an integral part of any Treasurer’s analysis toolkit.
Treasury Management Systems are installed to:

Integrate different ERP systems and databases to allow efficient report generation

15 | P a g e
 Allow connectivity with Banks for payments, statements

Allow direct access to SWIFT networks for payments, statements

Enable advanced and sophisticated Treasury Risks Analysis

Integrate Dealing, Reporting and Accounting functionality with one system 10

10
www.fedai.org.in

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 BANK TREASURY

What is a Bank Treasury?

Modern banks are huge entities employing thousands of people in their workforce.
However, amongst the various departments present at banks, treasury department is the
most important as well as the least understood. In this article, we will provide a brief
overview of these treasury operations. The treasury department of a bank is responsible
for balancing and managing the daily cash flow and liquidity of funds within the bank.
The department also handles the bank's investments in securities, foreign exchange,
asset/liability management and cash instruments 11

What does Treasury department do in a Bank?

Treasury generally refers to the funds and revenue at the disposal of the bank and day-
to-day management of the same. The treasury acts as the custodian of cash and other
liquid assets. The art of managing, within the acceptable level of risk, the consolidated
fund of the bank optimally and profitably is called Treasury Management. It is the
window through which banks raise funds or place funds for its operations.12

Every bank has a treasury department. Particularly in the last five years, these
departments have been at the heart of all major financial institutions. One of the main
functions of a treasury department is to control and manage the bank's money (in terms
of capital and liquidity) and to make sure that all parts of the bank can readily access
the cash they need for their business activities. By doing so, it makes sure that the bank
remains financially secure, stable and able to function effectively to help its clients. A
treasury department is also responsible for liaising with the bodies that regulate banks,
which set rules regarding banks' capital and liquidity. In order to ensure that banks are
better able to withstand any future market stresses, their capital and liquidity
requirements have become an area of increasing focus. Banks' treasury departments
work closely on these issues and have a critical role to play. The treasury function of a
bank is now an even more challenging and interesting place to work.13

11
www.rbi.org.in
12
https://rbidocs.rbi.org.in
13
http://thegatewayonline.com/investment-banking/types-of-work/barclays-treasury-the-heart-of-the-bank

17 | P a g e
 How does treasury work with other parts of the bank?

Working in Treasury gives you the opportunity to interact with all the different parts of
the bank. It's important for people across the bank to understand the implications of
their trading activity on the bank's capital, the cost of the funding they use, and how
our capital and liquidity are regulated and controlled. All parts of the organisation
come to us to get that knowledge and practical advice. For banks like Barclays,
operations are global, so the Treasury department is not just people here in London.
The department is spread across the world - for example, we have teams in many
locations, from Singapore to New York to the UAE. Most banks have whole
departments devoted to treasury management and supporting their clients' needs in this
area. Until recently, large banks had the stronghold on the provision of treasury
management products and services. However, smaller banks are increasingly launching
and/or expanding their treasury management functions and offerings, because of the
market opportunity afforded by the recent economic environment (with banks of all
sizes focusing on the clients they serve best), availability of (recently displaced) highly
seasoned treasury management professionals, access to industry standard, third-party
technology providers' products and services tiered according to the needs of smaller
clients, and investment in education and other best practices. A number of independent
Treasury Management Systems (TMS) are now available world-wide such as
Hedgebook Pro, Derivative Pricing and Hedgebook Audit, allowing enterprises to
conduct treasury management internally. For non-banking entities, the terms Treasury
Management and Cash Management are sometimes used interchangeably, while, in
fact, the scope of treasury management is larger (and includes funding and investment
activities mentioned above). In general, a company's treasury operations comes under
the control of the CFO, Vice-President / Director of Finance or Treasurer, and is
handled on a day-to-day basis by the organization's treasury staff, controller, or
comptroller. 14

Why Treasury Operations in Banks?

To meet Statutory requirements - SLR @23% of Net Demand & Time Liabilities and

CRR @4.25% of NDTL

14
https://www.researchgate.net

18 | P a g e
To Deploy Surplus funds profitably.

To raise resources at competitive rates from domestic & global markets.

To remove asset-liability mismatches

To gain from daily fluctuations in financial market through trading activities

To hedge open positions (for mitigating interest rate/ exchange rate risks)

Functional areas of Treasury

Derivatives

Forex

Precious Metals

Equity Market

Investments

Funds Management

Bulk Deposits

SLR/CRR Maintenance

Functions of an Integrated Treasury

Reserve Management and Investment

Liquidity and Funds Management

Asset-Liability Management

Risk Management

Transfer Pricing

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 Derivatives Trading

Arbitrage

Capital Adequacy

Structure of an integrated treasury

The treasury department is manned by the front office, mid office, back office and the
audit group. 15 In some cases the audit group forms a part of the middle office only.

The dealers and traders constitute the front office. In the course of their buying and
selling transactions, they are the first point of interface with the other participants in
the market (dealers of other banks, brokers and customers). They report to their
department heads. They also interact amongst themselves to exploit arbitrage
opportunities.

A mid office set up, independent of the treasury unit, responsible for risk monitoring,
measurement analysis and reports directly to the Top management for control. This
unit provides risk assessment to Asset Liability Committee (ALCO) and is responsible
for daily tracking of risk exposures, individually as well as collectively. The back
office undertakes accounting, settlement and reconciliation operations. The audit group
independently inspects/audits daily operations in the treasury department to ensure
adherence to internal/regulatory systems and procedures. 16

Front office activities (Strikes deals)

The bank needs to optimize its cash flows in order to ensure that shortfalls are fully
funded, and any surpluses are invested in order to maximize its returns. Doing the deal
is classed as ‘front office’, where as the reconciliation of payments is ‘back office’.

Historically the dealer wrote the details of the deal on a slip of paper, which was later
input into the system by the back office. A good treasury function will expect th e
treasury team to develop new ways of attracting the cheapest funds. It is a necessary
for the bank to attract deposits on a long term. One of the banks objectives therefore

15
p1xhr2w8ts37fbalioe6qfro-wpengine.netdna-ssl.com
16
www.managementstudyguide.com

20 | P a g e
will be to have depositors roll over their money held on deposit, so that short term
deposit effectively becomes medium term fund for the bank basis.

Mid office activities (Risk management)

Produces the risk management reports and checks for compliance with internal limits.
Tends to be link with the back office. Thus manual dealing slip are collected by middle
office staff for onwards transmission to the back office. Check that dealing slips are
completed correctly and the settlement instructions are proper. Queries from the back
offices on deals would be filtered through the middle office.

Back Office Activities (Settlement & Accounting of Deals)

The back office sees to accounting records, compliance with government regulations,
and communication between branches. Example - In banking, the back office includes
a strong IT processing system that handle position keeping, clearance, and settlement

How does it Operate?

Clearance of trade comparison and matching, trade netting, securities message and if
applicable securities lending.

Steps involved

•First part is tradecomparison and matchingwith both counterparties.

•Next step may involvenetting of trades.

•Check to ensure thattransactions areappropriately executed.

Transfer of ownership.

Asset Liability Management

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 The primary function of the treasury department of any banks is to ensure that its
assets match its liabilities in every possible way. It is the job of the treasury department
to prepare various financial models which help on forecasting the amount of net
interest income that the bank stands to make if different economic scenarios play out.
It is also the job of the treasury department to predict exactly how sensitive this non-
interest income is to external shocks like changes in the interest rate.

The treasury department collates this critical information and then passes the same on
to decision makers who then decide the kind of assets that they want on the banks
balance sheet. These decisions are then further translated into loan targets which bank
officials have to meet. Also, based on the information received from the treasury, the
bank refrains from using certain kinds of deposit liabilities. Hence, treasury department
profoundly influences both deposit taking and loan sanctioning functions of the bank. 17

Capital and Reserve Requirements

Since the treasury department is basically in charge of the bank’s balance sheet, it is
also responsible for setting aside reserves to meet the reserve requirements prescribed
by the Central Bank. Also, the capital requirements prescribed by the Basel norms have
to be met. Failing to meet these requirements has detrimental consequences since
penalties are levied by the Central Bank. At the same time, holding an excess amount
in reserves provides no benefit since such amount does not earn interest at the market
rate and therefore represents opportunity loss for the bank. 18

Liasioning with Regulatory Bodies

The treasury department of banks is highly regulated. Since they are the ones that are
supposed to maintain the capital adequacy ratios and reserve ratios, they are also the
ones that are supposed to liaise with regulatory agencies on such issues. Executives
from the treasury department are usually invited by the government when decisions
regarding the banking industry need to be made. Such executives also lobby on the
industry’s behalf if adverse regulations are put into place. 19

Liquid Investments in Government Securities

17
Ibid
18
Ibid
19
www.treasurers .org.in

22 | P a g e
Treasury departments at banks are also in charge of maintaining a certain portion of
their portfolio in highly liquid government securities. In countries like the United
States, this is done because the banks act as broker-dealers to the governments and are
expected to hold these securities before they can be further sold. In other countries like
India, banks are required by law to maintain a certain percentage of their portfolio in
liquid government securities. This lends safety to the bank’s portfolio while
simultaneously creating a highly liquid market for government securities.

Disaster Management

The treasury operations of any bank are responsible for managing its operations in the
event of a disaster. Thus, to be prepared for the same, the treasury department has to
anticipate the risks that can materialize over time. The treasury department is
responsible for using tools such as derivatives to hedge the bank’s exposure to
different kinds of risks. The late 2000’s have seen the proliferation of credit derivat ives
in the market which allow the banks to hedge even their basic risk i.e. the risk of
nonpayment by counterparties. Apart from that, treasury departments are also
important for insuring all the physical assets, the destruction of which can have a
material impact on the bank’s business.

Back Office Functions

Treasury departments also have to perform a lot of normal back-office activities. They
are supposed to regularly communicate with their branches regarding the extent of
deposits that have been taken and the extent of loans that can be made. They also have
to liaise with Forex department and proprietary trading department to monitor the
amount of risk that the bank can take in real time. At the same time, the treasury
department is responsible for ensuring that all branches, as well as ATM’s, are well
stocked with cash to meet the service levels. When banks run out of cash, it severely
affects their reputation. The treasury department conducts complex calculations to
ensure that adequate amount of cash is available wherever required to avoid such
situations. The treasury department is, therefore, the heart of the banking industry.
Executives working in this department get a bird’s eye view of the operations of a bank

23 | P a g e
 that are spread out over cities, nations and even continents. These executives
understand the concept of cost of funds and oversee its application. 20

20
Ibid

24 | P a g e
 CONCLUSION

Treasury management therefore refers to all activities involving the management of

revenues, inflow and outflow of governments, banks and corporate. Treasury is a
special term within a compass of the broader term finance. In India, the banking
operations have been enormously deregulated. The treasury management function is
primarily concerned with managing financial risks through the matching assets and
liabilities. This function increasingly needs to provide management with an overall
measure of the added value to the business to justify inherent costs in setting up
treasury operations. The debate concerning whether treasury operations should be
considered separate profit centres hinges upon adequate performance measurement, a
topic which I have not attempted to address in this paper. The paper has a detailed
study of treasury in both banks and corporate. What exactly treasury is and how they
are different as focus on an extremely different topic altogether. After the description
the analysis is given so as to why treasury is important. What steps are involved in
such treasury operations and how great it is for the final good outcome due to the
various reasons. The explanation of how these treasuries work has also been
incorporated further along with the functioning areas, what are the steps involved for
the same, etc. In accordance with all these and other topics that have been discussed in
detail herein it is an obvious fact and conclusion that treasury operation is very
important it plays a vital role for good outcome in any field as here the focus is mainly
upon the banking sector and the corporate sector.

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