Published: July 01, 2024
In the first of a new TMI miniseries ‘Treasury Angles’ looking at treasury in non-corporate settings, we speak with professionals from the banking and FI space and discover some important differences alongside the many similarities.
Being a treasurer is a specialist role, but it may come as a surprise to outsiders to learn that within that specialism are specialists. It sounds almost implausibly niche but as a key component within a service provider required by every other industry on the planet, the banking and financial services treasurer is much in demand.
“In essence, the bank treasury and corporate treasury worlds are part of the same coin,” comments Alexandros Koliavrás, Director, Head of Treasury Finance & Finance Transformation, ING Americas, former Group Treasury Controller, Philips International, and Founder and President of the Hellenic Association of Treasurers (HAT).
“In both functions, the aim is to establish a proper cash and liquidity forecasting mechanism that is of paramount importance for the short-term operational quality of the organisation. What’s more, the treasurer in both settings is there to ensure financial robustness via optimal capital structures that answer to the longer-term structural needs of the organisation.”
However, continues Koliavrás, “every coin has two sides”. On the governance side, whereas companies may be evaluated only by credit rating agencies, every bank faces this on top of regulatory supervision.
Although Koliavrás believes that “the similarities outweigh the differences”, he adds that treasurers in the banking space face one additional and immense pressure. They are predominantly responsible for managing the regulatory liquidity, capital, and financial risks within an industry estimated to represent around 20-25% of the world economy. It is not an over-statement to suggest that if a bank’s treasury fails in its core duties, the organisation could very quickly collapse. Of course, corporate treasurers have an equally challenging set of pressures with which to contend, but when a bank or major FI fails, it often has repercussions far beyond its immediate stakeholders.
Thomas Maurer, former Head Treasury at Julius Baer and Global Head Interest Rate Competence Centre, has learnt his trade facing some of the most pressurised situations. It has proven fruitful. Indeed, having experienced various financial crises over his long career, including the pound’s exit from the European Exchange Rate Mechanism in 1992 and the failure of Barings Bank in 1995, he jokes that “if you suffer a lot, you can be a good treasurer”.
Now a freelance consultant – advising banking, insurance, corporate treasury, wealth and asset liability management (ALM) clients – he knows that sufficient liquidity must be available to a bank at all times. He knows, too, that ever-tightening financial regulation, demanding proof of liquidity planning, places treasury at the operational heart of every bank.
While more generally, a bank treasury’s role is to support the wholesale and retail banking units of the organisation, the main reason for the existence of any treasury department, whether this is in a corporate, a bank or public sector environment, is to successfully mitigate financial risks, says Koliavrás. “But after that, the fundamental value creation of the bank treasury is to ensure optimal funding and capital structure that ultimately benefits customers with the lowest possible rates on the wholesale banking side and the highest on the retail banking side.”
Similar to the corporate world, a bank treasury is governed by applicable risk appetite limits. These, notes Koliavrás, are set by financial risk management policies, and operate based on annual, rolling forecast and strategic financial plans for capital and funding. “The key to delivering on these main pillars, and mitigating any risk around them, is proper, timely, and accurate communication of information with wholesale and retail banking divisions.” This interaction, he adds, is necessarily a two-way flow “to ensure treasury knows if there are any business developments that will affect the balance sheet, because that will impact how treasury responds”.
Of course, bearing in mind a bank is still a business, treasury must pay heed as to how its approach to risk and liquidity management ultimately serves profitability. The core services that a bank treasury offers to its business colleagues are therefore very much tied to what a bank offers to its customers. This sets the scene for a delicate treasury balancing act.
A key component of banking is ensuring new client money is continuously onboarded. One of the key discussions most relationship managers (RMs) have with their clients is about interest rates. “As treasury, we have to ensure the rates being proposed not only support the aims of the RMs but also that they align with what the bank is paying for its own credit risk,” says Maurer. It is, he notes, all about finding the balance between attracting new deposits and ensuring the required interest rate differentials are attained.
While this balancing act has always been a necessary treasury skill, the pressure to get it right has increased over the years. Indeed, notes Maurer, because clients are better informed about rates, and are more open to transferring assets to other providers, they can be more demanding. But when that pressure to offer attractive rates is not managed effectively, and a bank needs to bring in extra cash to fund its ‘generosity’, that rate mismatch can prove more damaging than simply losing a customer.
Credit Suisse had a number of issues leading up to its insolvency troubles in 2023. It’s what the Swiss Financial Market Supervisory Authority FINMA described as “inadequate implementation of its strategic focus areas”. The bank, says Maurer, had been offering interest rates at “abnormally high levels” just to secure liquidity. This level was ultimately unsustainable, and as Silicon Valley Bank (SVB) in the US collapsed in March 2023, it accelerated the ‘contagion’ panic among investors who started scrutinising other banks and that prompted them to pull their cash from the ailing Swiss institution.
When rates had been ‘lower for longer’, long-term lending by banks was desirable to try to extract as much margin as possible. But caution over greed is always urged, says Maurer. When rates suddenly rose rapidly (as they have several times over the past few decades), he believes that some banks were caught out, having over-invested in the longer term. SVB is a prime example of this, its errors of judgment shining a critical light on other institutions.
Managing liquidity is not an issue for the bank treasury to navigate in isolation, but one in which the ALM committee must be deeply involved, notes Maurer. This should see the CEO regularly challenging the CFO and treasurer on the course of action being taken to limit potential vulnerabilities. “If the CEO does not know about the state of the balance sheet, the bank is looking at running into long-term problems,” he warns.
The treasurer also needs to have a strong grasp of the bank’s liquidity ratios. These include the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) required by Basel III. If ever there is a liquidity issue, banks can’t simply refuse to extend client loans beyond maturity, as doing so would be commercially and reputationally disastrous. The treasurer, therefore, has a huge responsibility to understand ratio calculations, and report upwards should a negative liquidity ratio look like emerging. As Maurer says: “It’s up to the treasurer to be much more informed about this than the CFO, who may have many more topics to consider.”
The main sources of funding mark a key difference between bank and corporate treasurer. A retail bank, for example, takes customer deposits whereas a corporate will issue debt, often in the form of a bond or commercial paper. Bank refinancing comes in the form of a constant stream of many thousands of new client deposits.
While a bank must maintain trust among its diverse pool of customers to secure their deposits at scale, for the corporate, bond issuance is periodic and targets far fewer investors of much larger sums. The pressure is thus on the corporate to present a case directly to a concentrated pool of professional stakeholders, such as market analysts and rating agencies, to counter any negative influences that might harm its funding efforts.
A corporate might also be more willing to pay a wider credit spread to secure funding than a bank would, notes Maurer. Banks may also tap central banks and have other options such as repurchase agreements (repos). But there may well be no choice for the corporate, says Maurer. “It has to lock in the funding for the long term and for that they may pay a credit premium.”
There are clearly different sets of pressures with which corporate and bank treasurers must contend, but there are pressures nonetheless. With this in mind, it may be news to the corporate treasury community but, comments Maurer, there is another notable difference between bank and corporate. For their services, “bank treasurers are typically paid much more than their corporate counterparts”. This is anecdotal and should be taken up with respective paymasters!
The experience and knowledge required to be a bank treasurer today typically requires an appropriate academic background. “In recent years, we’ve seen the birth of various qualifications within the financial universe,” notes Koliavrás. “But formal qualifications are just one way to obtain knowledge on the subject. Other means include seminars, webinars and relevant cross-functional work experience.”
Speaking in his HAT capacity, Koliavrás advocates that since the foundation of the Hellenic Association of Treasurers, there has been “a concerted effort to promote inclusivity and mobility” between corporate and bank treasurers. “We have a lot of knowledge to explore and share, and we do so by organising seminars around bank treasury-related topics, and by leveraging our vast international network of corporate and bank treasurers spanning in 21 countries.”
For Maurer, a natural curiosity and willingness to learn “at the sharp end” is also an essential bank treasury tool. He recalls the pre-internet days, when he first started, having to buy printed books on arcane topics such as the currency risk on balance sheets. But first-hand experience is always advantageous. “Today, bank treasurers can access specialised teams providing data and information. But I believe it is still the best schooling to have had real liquidity market experience, going to banks, asking for prices, and understanding first-hand all the processes involved in trading.”
The professionalism in bank treasury is self-evident, and its practitioners tend to be viewed by non-treasury colleagues with a high level of respect. The status has not changed much over the decades, declares Maurer, but he reveals that RMs today “tend to complain more about treasury”. The reason, he explains, is simple: RMs increasingly feel the need to offer better pricing to fulfil their “new money goals”, which, in turn, are driven by analysts’ predictions. This creates “a bit of a panic” for them, and treasurers must not be drawn by it.
In parts of the Middle East and Asia in particular, he notes, there is a greater client willingness to switch banks if the pricing is not right, whereas European clients tend to be more accepting. On the other side of that coin, treasury must level the price for all, with some small exceptions (such as asset size and maturity), to ensure liquidity metrics are workable.
Aside from fielding complaints from colleagues driven by an opposing commercial perspective, Koliavrás also sees a new positive take on the value of bank treasury. “Whether a corporate treasury in Athens, a bank treasury in New York, or a public sector treasury in Amsterdam, treasury was always considered to be a supporting function, a cost centre,” he comments. “But in the past decade, we have seen treasury departments pushing into the front line. They are adding value by ensuring timely cash visibility across short- and long-term horizons, and taking on the management of a varied range of financial and, more recently, non-financial risks.”
With treasury departments likely to continue to absorb operations from other areas of the business in light of a wider push for finance transformation, the importance of treasury actions in a bank sanctions the individual treasurer’s seat on the ALM committee. However, treasury’s movements are still bound by the risk framework set by that committee. As such, Maurer does not see strategic decision-making being part of treasury’s remit. “Bank treasury has a lower-level of impact on strategy – a corporate treasurer may have more influence.”
Koliavrás takes a slightly different view. “In a bank, strategy and policies are always set up by the triparty committee of treasury, finance, and risk, with the support of other functions such as legal, tax, and compliance. In a corporate world, both finance and risk are under treasury in the first place. The bank treasury, as the main stakeholder looking at the market, is the right business partner to assess market developments. Together with the business, they define strategies that will benefit the organisation and its clients.”
That said, Koliavrás highlights that bank treasury exists to support the retail and wholesale banking businesses that in turn support corporate clients. “It means that the role of a bank treasury in achieving the optimal funding mix, while managing the financial risks and any regulatory developments, is doubly important because it assists market growth and mitigates risk.”
Today, every treasury is facing interesting times, and for those plying their trade in banks, events can develop rapidly. When 2023’s Credit Suisse debacle emerged, there were sudden client cash withdrawals, recalls Maurer. Of course, runs are not unheard of, but historically these tended to be physical withdrawals. Today, electronic bank transfers ensure funds are moved with far greater speed. That presents a greater threat.
“Treasury needs to work closely with the bank’s payments department to be able to monitor outflows,” advises Maurer. “With the advent of instant payments, the element of control previously supported by traditional intraday batch runs is now lost. The 24/7 instant flow can diminish treasury’s control; if there is no capacity to react immediately to sudden outflows, liquidity may be compromised.”
While not every bank is currently set up for instant payments, Maurer urges all bank treasurers to start thinking about enhancing their liquidity buffers to make sure daily liquidity needs can be fulfilled. “I’d suggest not going too long on portfolios, and ensuring access to an intraday window at the central bank by posting good collateral.”
While instant payments may suit some corporate treasury needs very well, their delivery may prove to be a little more expensive for banks. But, states Maurer, ensuring daily liquidity is not an option for a bank, so paying a premium to safeguard it should not be an issue either. And just in case it is, he adds that a bank treasurer’s remuneration “should never be measured by P&L”.
An accurate daily balance sheet report, to alert the department to the actual numbers, might make life easier for the bank treasurer too, says Maurer. “If a client is taken on with a significant term deposit, treasury needs to be notified. It’s about developing trust with other functions, but treasury also needs to understand every significant financial event to be able to effectively plan liquidity at all times.”
As a conduit and mitigant for the actions and needs of many other functions, Maurer judges the role of bank treasurer to be “one of the most interesting – and well-paid – jobs in a bank”. These plus points may be the key distinguishing factors for some professionals.
In the next article in this series, we will consider the pros cand cons of being a treasurer in a business under private equity (PE) ownership.
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