TREASURY ANGLES
While bank treasury shares some similarities with its corporate counterpart, there are also some key differences that shed considerable light on how banks operate. Following on from TMI’s recent look at the fundamentals of this side of the treasury coin, we talk to Simon Atkins, European Head, Treasury and Financial Markets, ABC International Bank, to see how it works in practice.
London-headquartered ABC International Bank (ABCIB) is part of Bahrain-based Bank ABC Group. It acts as the latter’s European hub, supporting trade and investment between Europe and the Middle East, North Africa and Turkey. Major shareholders are the Central Bank of Libya and Kuwait Investment Authority.
As treasurer responsible for ABCIB, its European subsidiary, and a full UK branch of Bank ABC Group, Atkins’ remit stretches across three balance sheets and jurisdictions. This naturally presents different challenges in terms of handling their respective laws, regulators, currencies, products, and clients. At a high level, his main duties relate to managing liquidity, interest rate and currency mismatches, ensuring regulatory and business compliance across these geographies.
“One of my first duties is to liaise with the Head of Corporate Treasury on all activities across those three balance sheets, in terms of funding requirements,” he explains. This might concern any of the day’s fixings, drawings, or upcoming commitments. “It gives us a grounding in the money coming in or going out the door, any currency-related issues we need to manage, and what necessary measures we need to take in the market to make sure we’re OK.”
This discussion correlates with “an almost half-hourly conversation” with the prudential regulatory risk team, ensuring that all of the metrics are going to be sufficient throughout the day, alongside any other challenges that might arise. It means, for example, considering using the bank’s AFS (available-for-sale) securities book to manage its liquidity coverage ratios.
Close scrutiny by regulatory authorities is a key difference between banking and corporate treasury. Although many corporate treasuries are answerable to a board or an investor base, usually via the CFO, every bank treasury will have a regulatory team that is a “constant companion.”
“We obviously have regulatory thresholds to which we must adhere, but then we also have internal warning indicator limits to watch,” continues Atkins. “We’re a well-funded bank, and that’s wonderful. But we still have challenges in other areas, especially around managing currency mismatches. By working closely with our ‘Reg’ team, we are able to make the right moves to minimise any market impact including currency related volatility.”
In constant dialogue and quick off the mark
It is a huge responsibility, and one for which Atkins has taken a beneficial, if circuitous, route to prepare himself, with stints at HSH Nordbank, CIBC, Barclays de Zoete Wedd and the former Banque Paribas. He started his career “many years ago” in equity sales and then FX sales before becoming a short-term interest trader. He graduated from here into bank treasury, running a sizeable treasury and capital markets business, spanning the asset class spectrum. This culminated in a period as Treasurer and Head of Financial Markets with Lloyds Bank Corporate Markets, based in Singapore.
His UK background stood him in good stead for this role, the Monetary Authority of Singapore (MAS, Singapore’s regulator) being modelled on the UK’s Prudential Regulation Authority (PRA) and operating with a comparable regulatory framework and metrics.
Since October 2023, Atkins has been at the treasury helm for ABCIB, but also sits as the bank’s Head of Financial Markets for London and Europe. Once again, he finds himself immersed in the trading world, typically orchestrating dealings on the AFS and High-Quality Liquid Assets (HQLA) portfolios. This could see decisions being made around when best to take unrealised profits or reviewing available options to add to or restructure those portfolios.
This function additionally covers client FX business flow. “We have a number of extremely active clients across our MENA [Midde East and North Africa] corridor specialism,” notes Atkins. “Some of these can be particularly demanding in their FX requirements, principally at the front end, so FX spot and short-dated swaps, and we can turn over huge volumes here.”
Because Financial Markets is a small team, Atkins is often found exercising his trading skills when the desk needs his input. “I have all the trading systems right in front of me, so if they’re busy, I can step in, pick a client, quote them, manage the risk, or do whatever I need to do.”
Team members are in constant dialogue “from the moment we come in in the morning, until the moment we go home”. Usually, the day starts with a team meeting, mulling over “all the usual kind of trading metrics and economic events”.
“We talk about the interest rate curve, what’s happened in the bond market overnight, what statistical releases are pending that day, where we see the risk, what the market is thinking, what’s priced in for the Bank of England and other central banks, where we think there’s a challenge to that – and then we’ll set out our day’s thinking on where we want to be, and how we achieve that.”
Risk, codes and reputation
While these important activities have become embedded in Atkins’ treasury and trading world for some time, he says the greatest change materialised post the 2008 global financial crisis, when the level of scrutiny that the regulators impose on banks ramped up considerably. Although the authorities have, and continue to, enforce mandatory requirements to keep the financial sector on an even keel – notably derived from the Basel Accords – a number of voluntary best practice codes have also emerged in recent years.
“We’re a signatory to the UK Money Markets Code,” says Atkins. “All of these best practice codes drive good behaviour – and this is now absolutely critical to the industry’s success. Integrity in today’s financial sector is non-negotiable,” he emphasises. And regulators have demonstrated time and again that if a bank behaves badly, the sanctions that will be imposed upon it will far outweigh the benefits of its actions.”
There is now a major and ongoing educational programme (such as by the Chartered Banker Institute) for newcomers to banking to understand that requirements for honesty, integrity, reputation, must be “front of mind,” states Atkins.
When it comes to managing its own risks, Atkins’ treasury operates with three lines of defence: risk committees, risk guidelines and standards, and risk policies. These all escalate to the board risk committee.
A re-evaluation takes place twice a year, assessing utilisation limits. “If we are pushing up against those limits, we’ll look at why, reflecting on whether that is a legitimate business need or if too much risk is being taken. And if the limits are not being used, we’ll reconsider why we are putting in the required capital.”
Treasury is constantly trying to find the optimum risk framework that enables it to safely deliver the bank’s business model for all stakeholders. To keep an eye on proceedings, Atkins chairs the bank’s financial markets control forum. It asks tough questions about the bank’s approach to liquidity management. HQLA and AFS are essential components of this. They are vital in ensuring that the bank can meet its short-term obligations during periods of financial stress.
Managing risk through constant review
“We need to know if we have sufficient limits in HQLA, how well we are prepared if the liquidity situation tightens, and whether or not we need to add more to the portfolio,” explains Atkins. “It’s the same with the bank’s AFS assets. It’s why we have a sizeable portfolio of high-grade assets that we can turn into cash quickly, should an idiosyncratic risk appear.”
While Atkins believes that the risk departments of all major banks are skilled at assessing political situations and taking informed decisions, liquidity remains the most significant concern for most. “In every bank crisis, it’s not necessarily the underlying quality of assets that has been the problem, but their lack of liquidity, and therefore inability to fund operations,” he observes. “It’s always going to be the greatest threat to any bank, but it could be magnified by geopolitics over which we have no control. This is why treasury insists on frequently reviewing liquidity lines and contingency funding plans.”
The roots of ABCIB may require treasury to pay close attention to geopolitics and market sentiment, but they also give it an advantage. Indeed, Atkins says, with good coverage “right across the region,” it has clients pursuing a pathway into Europe, and clients in Europe seeking access to the Middle East. “Those that don’t want to be in the region often don’t understand it. We do understand, and we’re happy to be here and support and encourage our clients both ways,” he explains. “When there’s political change from time to time, some of the big banks have been quick to move out. And when it calms down, they move back in. For our clients, it matters that we are there for them, whatever happens.”
Surviving the maelstrom
Atkins arrived at ABCIB armed with some finely honed trading skills, in part earnt amid a period when global finance was facing some of its darkest days. But not for the first time has a treasurer of his experience cited the warnings of that sternest of tests.
“If you think back to 2008 when AAA RMBS [residential mortgage-backed securities] and CMBS [commercial mortgage-backed securities] were trading at plus-15 or plus-20 over LIBOR, and suddenly blew out to 150 or 160 basis points, if you’ve got loans on your books that are earning you 50 or 60 basis points over LIBOR, and you’re having to fund at 250 or 300 over because of that liquidity compression, that is potentially bank-busting, and banks did go bust.”
As a trade finance bank, ABCIB typically deals in short-maturity profile assets; it’s an immunisation of sorts. But banks that have extended out their maturity profile on their asset side to say three, four or five years, have to hedge their risk.
With personal training and development spread across the good times and the bad, Atkins admits he has “learnt some very hard lessons.” During the onset of the global financial crisis, for example, he recalls working all weekend with very little sleep.
“We were frantically going through the structured credit books, trying to understand what exactly we had, and what the repricing would be. The BBA [British Bankers’ Association] were somehow publishing LIBOR when rates were nowhere near reality. It was absolutely crazy,” he recalls. “Under those conditions, you have to learn fast. If a bank was publishing LIBOR, it was fixing all its loans and interest rates to something completely unrealistic. It forced them into securing liquidity at maybe 200 or 300 basis points more expensive, and every day it pushed them closer to bankruptcy.”
Having survived that maelstrom, Atkins understands why every day there is more to learn. “One of the first things I did when I joined Bank ABC was spend time observing and understanding some of the technicalities, such as how IRRBB [interest rate risk in the banking book – where if the rate moves adversely, a mismatch between the rates the bank sets on its loans and deposits can be created] really works. I also wanted to understand what the regulator requires from us as a bank. And it’s clear it seeks reassurance that it will not need to call us to find out what we’re up to.”
In response, Atkins put in place a training programme, using experienced external trainers, so that the whole team – regulatory risk, finance, and compliance – could upskill on IRRBB and “have a solid understanding of our risks and what has to be reported and when”.
There’s an element here of appreciating each function’s own set of challenges, and making sure “all are on the same page.” Atkins explains: “We all need to fully understand what’s driving our clients’ balance sheet. We need to know what their flows are and when they happen, why and when they hedge and to what percentage, what their risks are, and if they have cash locked up somewhere. It’s that level of education that treasury needs to deliver across an organisation.”
The reason is simple. “If we’re hedging lots of traded risk for the client, how do we know that we have a complete picture of its credit risk to us? We do that by removing silos and ensuring cross-organisation learning.”
As part of this process, at least twice a year, an off-site senior management strategy meeting takes place. This involves ABCIB’s London and Europe management teams, including treasury. With an agenda covering topics such as objectives for funding and assets, client yields and expectations, and how to drive product distribution, and because all voices are given equal weighting, knowledge sharing becomes a strategic endeavour.
No more ‘butting heads’
But Atkins’ treasury is also becoming more involved in the activities of the bank’s clients. This is usually manifested through contact with his corporate treasury counterparts, offering a direct path to understanding their issues.
There is one “surprising” outcome of these interactions. “As an industry, we are always talking about innovation and making seamless digital connections. But one thing I’ve appreciated since I’ve really taken on the client base is that a large majority of corporate treasurers still want to have a physical conversation rather than a virtual interaction.”
Day-to-day small-ticket flow business is perfect for tools such as AI, Atkins explains. “But for more strategic decisions, where they may need to understand market conditions in greater depth, they still want to pick up the phone. And while we’re not allowed to give advice, we can explain current drivers and highlight other points to consider.”
All of this suggests Atkins’ bank treasury is now operating very much in the foreground. “It’s a strategic driver that I’m working to, and one of the reasons I came onboard,” he responds. “It harks back to that idea of breaking down internal silos. It’s about treasury facilitating a more joined-up way of the bank engaging with clients, keeping the momentum going by being prepared for their future needs.”
While the rise in prominence of the bank’s treasury may require “a little adjustment” for some of his colleagues, Atkins reports real progress across the organisation. However, in some cases it has necessitated a back-to-basics approach. This might involve an explanation of the function of a balanced liability profile in driving the cost of funds transfer pricing (FTP, used to transfer costs for liquidity or funding, for example, to the business lines) and what treasury actually needs to make on its risk-adjusted return on capital.
“It’s consultative. Whereas before it was more like butting heads, now I’ll explain elements such as the symbiotic relationship between client deposits and bank lending, and the nuances of tenor matching, the dynamics of the yield curve, and the path of inflation; these discussions are an education for all.”
Taking note of eccentricities
With the ambition for digitalisation of services within trade finance gaining momentum, ABCIB is in the process of revitalising its core platform. It makes sense for a bank firmly in this space. However, switching off legacy mechanisms has to be treated with a great deal of caution, notes Atkins.
With ABCIB necessarily still straddling both digital and analogue worlds, it can be seen as a strength, Atkins suggests. “Many banks are trying to make trade finance settlement into a seamless, digital process. But that ignores a lot of the eccentricities that are still found in trade finance contracts and settlement procedures. We still have clients that don’t want straight-through processing; they need a little tweak here or there, such as grace days or terms extensions. These might not be easily programmed in digital systems, but we can still do it.”
With clients wanting to access the MENA region, and many also now pushing into Sub-Saharan Africa, there is huge growth potential for the bank, says Atkins. “We have to have the skill and the knowledge built into our own actions. Collaborating and learning within our organisation, and upskilling our people, will be our route to it because that’s how we will provide the right solutions for all of our clients. And treasury is right in the middle of that. In fact, I’d say we’re absolutely integral to what goes on in the bank.”
