Treasury management: Difference between revisions

{{Short description|Management of an enterprise's holdings and liquidity to mitigate risk}}

'''Treasury management''' (or '''treasury operations''') entails [[management]] of an enterprise's financial holdings, focusing on <ref name=":0"/> the firm's [[liquidity]], and mitigating its [[financial risk|financial-]], [[operational risk|operational-]] and [[reputational risk]].

Treasury Management's scope thus includes the firm's collections, disbursements, [[concentration risk|concentration]], investment and funding activities.

In [[corporation|corporates]], treasury overlaps the [[financial management]] function, although the former has the more specific focus mentioned, while the latter is a broader field [[FP&A|that includes]] financial planning, budgeting, and analysis.

In [[bank]]s, the function plays a slightly different, more integral <ref name="treasuryxl"/> role, managing also the link between the institution and the [[financial market]]s.

In both, there is a close relationship with the [[financial risk management]] area.

<ref name="investopedia">Permjit Singh (2021). [https://www.investopedia.com/articles/financial-careers/08/corporate-treasurer.asp "The Corporate Treasurer Serves as a Financial Risk Manager"], [[Investopedia]]</ref>

A company's treasury operation, typically, is under control of the [[chief financial officer|CFO]] or Vice-president / [[financial director|Director of Finance]];

and in larger entities is under a dedicated [[Treasurer#Corporate_treasurers|Treasurer]].

Operations are handled on a day-to-day basis by the organization's treasury staff, controller, or [[comptroller]]. <ref>Sean Ross (2023). [https://www.investopedia.com/articles/financial-advisors/121715/treasurer-career-path-qualifications.asp "Treasurer: Career Path and Qualifications"], [[Investopedia]]</ref>

The significant core functions of a corporate treasury department include:<ref name="investopedia"/>

The aim of risk managementis, generally, to identify, measure, and manage risks that could have a significant impact on the [[Corporate finance#Outline|business' goals]].

In this context,

<ref>{{Cite web|url=https://www.treasury-management.com/academy/29/introduction-to-managing-risk.html|title=Introduction to Managing Risk|last=Sanders|first=Helen|date=|website=www.treasury-management.com|archive-url=|archive-date=|access-date=2018-04-05}}</ref>

the focus is twofold,

<ref name="investopedia"/>

ensuring that the company can meet its financial obligations, and ensuring predictable business performance.

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It is important to note that the objective is not to eliminate all risk. Taking risk is a critical part of any business – "no risk no profit"; see [[risk appetite]] and [[enterprise risk management]].

It is important, however, to take risks only in areas that the business has competitive advantage. For example, an automotive company will want to take risks in design and engineering. but will want to avoid risks in currencies and interest rates. On the other hand, a bank will be in a position to take risks in currencies and interest rates but will avoid operational and regulatory risks.

See {{section link|Financial risk management#Application}}. -->

Treasurers are then tasked, more specifically, with managing:

* [[Liquidity risk]]: the company is unable to fund itself or is unable to meet its obligations; overlapping the above

* [[Market risk]]: changes in market prices (typically foreign exchange, interest rates, commodities) cause losses to the business

* [[Credit risk]]: that a [[counterparty risk|counterparty default]] causes loss to the business.

[[Operational risk]] - losses to the business due to fraud or error - will sometimes fall under Treasury, although as these risks are not directly financial in nature, they are often delegated to [[operational risk management|a dedicated team]]. In many sales- or lending-oriented businesses, credit risk is likewise not in direct scope. Re both, however, Treasury, will exercise some oversight.

Looking after contacts with banks and [[rating agency|rating agencies]], as well as discussions with credit insurers and, if applicable, suppliers concerning periods allowed for payment, in conjunction with the [[Corporate finance#Sources of capital|procurement of finance]], also form part of the treasurer's core business.<ref name=":0" />

==Banks==

{{further|Bank#Capital and risk|Investment banking#Middle office|Financial risk management#Banking}}

The treasury function is, as outlined, an integral aspect of banking institutions.

<ref name="treasuryxl">Aastha Tomar (2023). [https://treasuryxl.com/blog/what-is-treasury-in-banking/ What is Treasury in Banking]

</ref>

<ref name="financeunlocked">Chris Blake (2023). [https://financeunlocked.com/videos/Role-of-Bank-Treasury Role of Bank Treasury]</ref>

Its role arises, essentially, in that the bank <ref name="financeunlocked"/> receives funding (its liabilities) through [[Deposit (finance)|customer deposits]] and issuing [[Senior_debt|senior unsecured debt]], often [[bond (finance)|bonds]], in the [[Finance#The_financial_system|wholesale market]], and in turn deploys these funds to its various profit generating businesses (assets).

Treasury is then responsible for managing financial assets and liabilities, ensuring sufficient liquidity, and "capitalizing on market opportunities" <ref name="treasuryxl"/> to maximize profitability.

Most large [[bank]]s thus maintain dedicated Treasury Management [[Departmentalization|departments]].

These will, in turn, operate the following areas or [[Trading_room#Organization|desks]]:

* A [[fixed income]] or [[money market]] desk that is devoted to buying and selling interest bearing securities.

* A [[bureau de change|foreign exchange]] desk that exchanges currencies as a service to the clients.

* A [[capital markets]] or [[equities]] desk that deals in shares listed on the stock market.

Critically, Treasury maintains, also, an [[asset liability management]] (ALM) desk that manages any potential [[CAMELS rating system#Interest rate risk|interest rate mismatch]] — in the specific context outlined — as well as [[liquidity risk]] more generally.

Here, Treasury is responsible for the key [[funds transfer pricing]] (FTP) function, that prices liquidity for business lines within the bank; i.e., where funds that go toward lending products ([[Sales and trading|asset sales teams]]) are [[Funds_transfer_pricing#Banking_and_finance|charged a term and risk-appropriate rate]], whereas funds generated by deposits (and related) are credited similarly. (See similar re "[[risk pool]]ing".)

Relatedly, the bank’s treasury is usually integrally involved in [[balance sheet]] management, suggesting which currencies and terms are favorable from a funding perspective and which assets are required to meet various regulatory targets. <ref name="treasuryxl"/>

Re the latter, treasury is tasked with monitoring [[regulatory capital]] under [[Basel III]]:

more especially the [[capital adequacy ratio|capital adequacy-]], [[Basel_III#Leverage_ratio|leverage-]], and [[Liquidity regulation|liquidity coverage]] ratios,

as well as <ref name="financeunlocked"/> the bank's [[Total Loss Absorbency Capacity|total loss absorbing capacity]] (TLAC).

Bank Treasuries will often also support their clients' needs in these areas, through [[Treasury services|Treasury Management "services" or "products"]]; depending [[Investment_banking#Risk_management|on the arrangement]], they may or may not disclose the prices charged here.

Note that a number of independent [[treasury management system]]s (TMS) are available, allowing enterprises to conduct treasury management internally.

Smaller banks are increasingly launching and/or expanding their treasury management functions and offerings. This is due to: <!-- becauseof of the market opportunity afforded by the recent {{Clarify|reason=When?|date=December 2022}} economic environment--> an increased "focus" by banks ([[2007–2008 financial crisis|post crisis]]) on the clients they serve best; the availability of seasoned [[Professional_certification_in_financial_services#Treasury_management|treasury management professionals]]; access to industry standard, [[Third-party source|third-party technology providers']] products and services - tiered according to the needs of these (smaller) clients; and similar [[Management_consulting|access to]] [[best practice]]s and staff-training.

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*[[Financial management]]

*[[Financial risk management]]

*{{slink|Liquidity risk#Management}}

*[[Professional_certification_in_financial_services#Treasury_management|Certifications]]:

**[[Association of Corporate Treasurers]]

**[[Certified Treasury Professional]]