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Treasury Risk Management

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Published: 9th January 2011 by William Webster

Getting a fresh look at your treasury can give you a new perspective on the risks you are running and the things that you need to tighten up on. Why wait for the regulator? Here's one client's experience.


Like many banks this client's treasury had grown organically. There was always a need to balance risk and reward with more being expected from treasury towards the income statement.

In the good times risk and diversification seemed to be the way forward. When hedging was required derivatives were used. When yield was needed bonds were bought. When cash was in surplus it went to the highest bidder.

The risk

This is not an unfamiliar story and the bank had done well but now the management recognised that the treasury potentially contained risks that needed further investigation.

That investigation would form the basis of any necessary remedial action. This would not only help deal with heightened market volatility but also help the board understand more about how the bank's strategy affected risk in treasury.

The bank was aware that in the new intrusive regulatory environment the FSA was already signalling that increased capital and liquidity requirements would be used to restrain firms' particularly where controls and governance were perceived to be weak.

The Proposal

An initial meeting with the Chief Executive, Finance Director and Treasurer led to a three stage consulting proposal as follows:

1. A comprehensive review of all the risks in treasury. This included credit, liquidity and market risks, operational risks, regulatory risks, governance, systems and group strategy and its affect on treasury, limits, limit structures, limit reporting, ALCO and Board reporting. This was undertaken onsite with reference to all relevant documents, staff and systems.

2. A management report. This detailed report identified over 50 items requiring attention with each risk being graded on a scale of 1 to 5 in terms of its urgency. The report included recommended actions to mitigate the identified risks and the time frame under which this should be undertaken.

3. A board presentation and high level report. This provided the agenda to clarify the risks that had been identified and explained how the bank's strategy had influenced risk taking. It was recommended that the balance sheet structure was altered.

The Outcome

The bank's management agreed that a plan of action was necessary. This would deal with the identified risks over a 12 month period.

The client can now clearly demonstrate that robust action has mitigated or eliminated vulnerabilities in treasury. The balance sheet has also been altered in order to reduce exposures that were creating risks beyond the board's risk appetite.

This action is evident in the bank's ICAAP and ILAA. It would also be apparent from an in depth analysis or ARROW review that risk is managed.

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