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What does it take to build and manage a Treasury Department? AMInstitute Finance & Risk Forum – November 2012 . Why build a Treasury?. Economic environment has changed Drive for assets replaced by focus on funding Competition for retail funding increased NIM volatility

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What does it take to build and manage a Treasury Department?

AMInstitute Finance & Risk Forum – November 2012

why build a treasury
Why build a Treasury?
  • Economic environment has changed
    • Drive for assets replaced by focus on funding
    • Competition for retail funding increased
    • NIM volatility
  • Existing Treasury arrangements not meeting needs
    • Limited focus means no pricing power/higher cost
    • No control/options over innovation
    • Poor service from support providers
    • No identity/independence
  • Independent Treasury function provides opportunity for funding diversity


why build a treasury1
Why Build a Treasury?
  • Greater focus on Managing Risk by APRA, Boards and Management
  • Specialist area – you need expertise
  • To provide information on interest rates, the financial markets and the economy to other departments, management and the Board – for key business decision making


what does a treasury do
What does a Treasury do?
  • Treasury is a service provider for the business
    • A business’ risk appetite determines role of Treasury
  • Treasury as a core business function for ADIs
    • Liquidity Management – cash flow management & investing
    • Financial Risk Management – NIM, pricing & hedging
    • Capital Management – cap adequacy, hybrids
    • Debt issuing – refinancing & funding
  • Treasury can also be a profit centre
    • Buy and sell financial instruments e.g. bonds, swaps/options
    • Trade market exposures
    • Provide intermediary services for internal & external stakeholders


what does a treasury do1
What does a Treasury do?

Manage Risks

  • Identify, Quantify & Manage (Hedging)
  • Liquidity
    • Funding Plan, Daily cashflow, Liquidity Investments (Securities, Duration, Counterparties)
  • Market
    • Gap, VaR, EaR, NIM
  • Credit
    • Treasury Counterparties, large exposures
  • Capital Management
    • IMB Structure
    • Securitisation


what does a treasury do c ont
What does a Treasury do? cont.
  • Minimise Risk
  • IMB Treasury only uses hedging to reduce positions
  • IMB Treasury does NOT trade
  • IMB Treasury does use Balance Sheet Positioning
  • e.g. you want to be long fixed assets in a falling interest rate environment (loans & investments)
  • you do not want to be long fixed assets in a rising interest rate environment


how do you set up a treasury
How do you set up a Treasury?

Approach will differ depending on circumstances but likely to require the following key milestones:

  • Gain support of key decision-makers
  • Acquire skills
  • Define responsibilities
  • Determine structure
  • Build infrastructure & operating framework


1 support of decision makers
1. Support of decision-makers
  • Treasury not core retail – clear objectives essential
  • Significant commitment of time & money required
  • Requires a “champion” & Board support

Heritage experience

  • No Treasury function
  • Business model changed
    • Asset growth funded by Securitisation
    • Liquidity & capital pressure
    • Securitisation warehouse filling up – Plan B?
  • Treasurer hired within 6 months


imb experience
IMB Experience

IMB Treasury has always had strong support from management and the Board

Gradual evolution

IMB Treasury established early 1990’s Small team – 4.2 FTE (Treasury liquidity investments – 2.2 FTE and funding – 2FTE) reporting to CFO

I replaced Manager Treasury in 2000

Implemented Treasury system in 2002

Securitisation first issue 2003

Risk Management brought in house in 2005

Expanded into other areas e.g. debt funding, capital instruments


2 acquire skills
2. Acquire skills
  • Timing debatable – depends on workload of CFO
  • Having right skills assists at subsequent stages

Heritage experience

  • Skill set required defined by business priorities:
    • Securitisation
    • Capital management
    • Funding & debt issuance
    • Liquidity management
    • Financial risk management
  • Treasurer hired – previously Capital Markets Dealer & Securitisation Manager at BoQ


imb experience1
IMB Experience

Gradual evolution

Business case (cost/benefit analysis) to employ additional staff to enhance treasury team

I had a trading background

I had to learn new skills - securitisation, interest rate risk management

You don’t always need to buy staff, you can train internally


3 define responsibilities
3. Define responsibilities

Heritage experience

  • Treasurer reporting to CFO
  • Business risk appetite required separation of duties
  • Treasury functions existed but no framework
    • Liquidity, investing & financial risk managed in Accounts
    • Limited issuing undertaken – subordinated debt
    • Governance thin – no Board policies for Treasury
  • Treasury created as a distinct department
    • Immediately assumed existing processes
    • Back office within Accounts
    • Settlement processes separate but complimentary


imb experience2
IMB Experience
  • Clear segregation of duties
    • Front Office, Back Office (Settlements), Middle Office
  • Policies and Procedures
    • Develop over time
  • Reporting lines
    • Treasurer reports to CFO
  • Governance
  • Committees – ALCO, Pricing


4 determine structure
4. Determine Structure
  • Structure dictated by business needs
  • Processes evolve as priorities change & skills sets develop

Heritage experience

  • Dealing – 3 staff
  • Day to day liquidity management & investment activities
  • Market interface & pricing input
  • Debt issuance & hedge execution
  • Structured Finance – 2 staff
  • Securitisation issuing & maintenance
  • Term debt issuing & program maintenance
  • Financial Risk Management – 2 staff
  • Balance sheet forecasting, hedging strategies & scenario testing
  • Key financial metrics & analysis
    • Settlements – 2 staff
  • Austraclear, Swift, ASL etc.



Dealing team

Structured Finance

Financial Risk Management


imb experience3
IMB Experience

Need to consider:

  • What markets do you want to be in? – Middle markets, Capital markets, Securitisation, Broker
  • This will help determine: no. of staff, level of knowledge/experience you need
  • Outsourcing
    • Risk, Liquidity Investments, Settlements
  • Cost/Benefit analysis


imb experience4
IMB Experience
  • Dealers – 3 FTE
  • BDM’s – 3 FTE
  • Risk – 1 FTE
  • Settlements (Back Office) – 1 FTE
  • Accounts (Middle Office) – 1 FTE
  • Securitisation
    • Issued by Treasury but maintained by Accounts (Middle Office)

Need to consider:

  • Do you buy vs. Do you train?


5 build infrastructure operating framework
5. Build infrastructure & operating framework

Heritage experience

    • Basic requirements first – workflows set up in Excel
    • Day to day liquidity streamlined
    • Financial risk management recalibrated
    • Securitisation structures created & administration simplified
    • Back office formalised and capabilities augmented
  • Operating framework developed over time
    • Board policies written for capital, liquidity, financial risk
    • Settlement capabilities upgraded
  • Infrastructure developed as sophistication grows
    • Workflow management system acquired – limit control, separate activities
    • Balance sheet management system – value add through analysis
    • Funding strategy evolving – Credit ratings, debt program, new deals


imb experience systems
IMB Experience - Systems

Treasury deal capture

Monitoring credit exposures

Deal Confirmation and settlement advices

12 years ago



Hedge Accounting

Value at Risk

Sensitivity (PVbp)

Gap Reporting

Scenario Analysis


imb experience systems1
IMB Experience - Systems



Treasury deal capture

Monitoring credit exposures

Deal Confirmation and settlement advices

Value at Risk

Sensitivity (PVbp)

Gap Reporting

Hedge Accounting

Scenario Analysis


Funds Transfer Pricing

Cashflow/ Liquidity

Credit Analysis

Capital Modelling



imb experience5
IMB Experience
  • Systems evolved over time – gradual process
  • Straight Through Processing (Front Office to Back Office)
  • Complete Balance Sheet picture requires all data (Treasury and Retail)
  • IT Knowledge
  • Outsourcing
  • Do you Buy vs. Do you Rent
  • Cost/Benefit Analysis
  • IMB Risk Management experience
    • We wanted knowledge in house


ongoing management issues
Ongoing management issues

Heritage experience

    • Learning to manage the balance sheet
    • Balancing competing interests of liquidity/capital/NIM
  • Good back office is critical
    • Must commit resources to electronic payments channels
  • Develop an investor base that supports the business
    • Sustainable funding = $3 of potential funds for every $1 invested
  • Understand the importance of refinance risk
    • Successful deals are only good if they can be refinanced
  • It’s a merry-go-round with no finish line
    • Continual search for improved performance
    • Ongoing refinement of processes, skills & outputs


  • Regulation/Compliance
    • VaR/EaR ex.
  • Costs
    • Capital, Liquidity,
  • “Deposit War”
    • Majors attack on Retail deposits - Core funding of mutuals
  • Funding Diversification
    • Sources, Duration
  • Balance Sheet Management
    • All risks together
  • “Best Practice” – bar is a lot higher now



Establishing a Treasury Department requires commitment & resources

Benefits include:

Funding mix diversity – NIM stability

Better focus = better governance

Sophistication & skills in key financial operations

Market profile & credibility

Difficulties include:

Costs versus return

Finding the right skill set

Market volatility e.g. credit rating

Ongoing stakeholder management


  • Structure
    • Staff
    • Systems
  • Cost/Benefit
    • Costs will increase
    • Some benefits are unquantifiable



Must consider the use of Brokers, Advisers and Consultants

Depends on what you want to do, the size of your organisation, short term vs long term view

Youlearn more doing it yourself


You need to control your direction and not be talked into something the Broker wants you to do just because others are doing it

Use them to help your business - Do not let them run your business

Investing in FRN’s (credit risk - Europe, liquidity risk, capital loss?)

“don’t be tempted into new products to boost profitability unless you understand the risk and have the skill set to manage” Stephen Glenfield – CDO’s

Borrowing from professional clients – “hot money”


  • APRA – Supervise for Risk

Liquidity – liquid asset, credit risk, HQLA return?

  • The market is always right?
    • NCD’s – issued at margin over BBSW
  • Develop a Treasury Markets Culture
    • Have a view/opinion
  • Talk to each other/deal with each other