Future Of Bank Treasury Management - A Profession In Focus

1. Executive summary

   The continued economic instability and a tsunami of banking regulation over recent years has brought much change and challenge to the financial services industry. Against the backdrop of constantly changing local and regional regulations (which are not always harmonised), and ever growing political attention, the pace and scale of these developments has arguably changed the foundation of modern banking institutions. It can be argued that change initiated by the financial crisis has brought to the forefront previously forgotten divisions within financial institutions. None more so than Treasury.

   In this paper we briefly examine the current landscape in which Treasury operates and focus on the challenges it needs to overcome to achieve its post-2015 vision. Research for this paper includes results from the Deloitte Treasury Survey1 as well as views from external experts and our own expertise within the field of Treasury management.

   The major findings of the paper suggest that the Treasury function will be operating within a backdrop of increasing regulation and market volatility for the foreseeable future. Key challenges will focus on funding planning, infrastructure integration, liquidity and capital management.

   This paper raises the question as to whether current funding models are fit for purpose to overcome challenges presented by the lack of liquidity and long term market volatility observed in recent years. Development of a robust governance framework coupled with sophisticated funding models is offered as options to address these challenges.

   This paper also highlights that a significant proportion of banks continue to use Funds Transfer Pricing (FTP) models based on standard transfer rates. The ability to accurately evaluate and charge business lines will have a significant impact on the overall profitability of the firm.

   Regulation has been the primary driver for challenges faced in capital and liquidity management with an increased focus on data granularity, stress testing and reporting capabilities. This paper assesses how the development of an analytical data management framework can provide an enterprise-wide view of liquidity, stress testing and capital usage.

   As financial institutions emerge from tackling immediate regulatory demands; Boards are increasingly turning their attention to what they may encounter over the horizon. The Treasury function has a critical role to play in shaping bank strategy as Treasury linked challenges such as deleveraging balance sheets, maximising capital efficiency and improving risk-return ratios are here to stay for the foreseeable future.

2. Background

   The speed of regulatory change has increased since 2008 and in the coming decade, a raft of new regulation will come into force in an attempt to bring stability and confidence to the industry. This will not only have implications for the wider economy but also for Treasurers as they are forced to react to these challenges.

   As a result of business, market and regulatory challenges, the following key themes are emerging for the Treasury function:

   Note: The above illustration is not intended as a comprehensive list of regulations influencing the global financial services industry. The timeline indicates when a regulation was or is due to be implemented.

   Treasury functions have made significant efforts to improve their liquidity management, technology and reporting capabilities, however, this is just the beginning of the journey.

   This report examines the case for change and how 2013-2014 is an inflection point for Treasurers to transform and adapt, enabling them to meet the challenges and needs for post-2015.

   “ The 2008 crisis was global and financial services were at its heart, revealing inadequacies including regulatory gaps, ineffective supervision, opaque markets and overly-complex products.”

   European Commission - Shadow Banking Green Paper [March 2012]

3. Achieving the post-2015 vision

   Macro factors such as changing regulation, cost pressures and shifting markets have led to what we see as key themes and trends emerging for the near future and post-2015 for Treasury functions.

   Equally, banks as a whole will need to adapt their operating models and align to broader macro factors in order to meet the inevitable demands that will be placed on them, and to effectively position themselves to achieve the post-2015 vision:

   Funding: building a long term funding plan with improved funding models;

   Liquidity management: development of 'best in class' liquidity capabilities such as high quality stress testing and accurate daily reporting of key liquidity metrics;

   Capital management: developing an optimal capital structure that maximises equity returns whilst meeting the requirements of regulators and markets;

   Risk-centric culture: development of a holistic view of the risk across the organisation, building a risk-centric culture to ensure that balance sheets are effectively managed and the implementation of an economic capital model to facilitate strategic decision making; and

   Technology effectiveness: deployment of improved, flexible tools and technology to meet the changing market demands.

   2013-2014 is an inflection point for Treasurers to transform and adapt, enabling them to meet the challenges and needs for post-2015.

   Deloitte research

4. Funding: Planning

   Funding forms the cornerstone of any Treasury division. The lack of liquidity in the wholesale market observed during the 'credit crisis' and its resulting impact on funding resources, caught many Treasurers by surprise. Evidence perhaps that funding planning and review lacked focus in preceding years.

   What is the proportion of short-term (defined to be less than a year) wholesale financing?

   As Treasury functions look to the post-2015 environment, some of the key challenges being faced in this area and the options which could be considered to address them are outlined below:

1. Banks have made concerted efforts over the past few years to reduce their proportion of short-term wholesale financing however for many, this still represents a large proportion of financing which is susceptible to market...