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Treasury Risk & Liquidity Crises Management

• Treasury Risk & Liquidity Crises Management
• Presented by: Hafsa Tariq and Rabia Shariq

Introduction to Treasury Risk

• Treasury risk arises from managing a bank’s funding, liquidity, and financial assets.
• Ensures the bank can meet obligations while remaining financially stable.

Key terms: Treasury Risk

Core Objective: Profitability with Liquidity Safety

• Treasury operations aim to maximize profitability while ensuring liquidity safety.
• Balancing profitability and liquidity is vital for financial stability.

Key terms: Liquidity Safety

Treasury Functions in Banks

• Funding Management: Raising funds from deposits, money markets, and central banks.
• Investment Management: Investing surplus funds in securities and instruments.
• Liquidity Management: Ensuring cash availability for daily operations.
• Balance Sheet Management: Managing assets and liabilities efficiently.

Funding Management: Raising Funds

• Banks raise funds primarily through deposits.
• Market-based funding includes interbank lending and issuing bonds.
• Central banks provide funding options during crises.

Investment Management: Investing Surplus Funds

• Surplus funds from operations are invested in securities.
• Common instruments include government bonds, corporate bonds, and equity stakes.
• Returns from investments contribute to profitability.

Key terms: Corporate Bonds

Liquidity Management: Ensuring Cash Availability

• Liquidity management ensures smooth daily operations.
• Requires adequate reserves to address short-term obligations.
• Optimizing liquidity is critical to avoiding disruptions.

Key terms: Liquidity Buffers

Balance Sheet Management: Managing Assets and Liabilities

• Focuses on optimizing the structure of the balance sheet.
• Ensuring assets cover liabilities in both short and long term.
• Reduces mismatches and improves overall bank stability.

Types of Treasury Risk

• Market Risk: Caused by changes in interest rates, FX rates, and prices.
• Credit Risk: Counterparty failures and default risks.
• Liquidity Risk: Inability to meet short-term obligations due to shortages.
• Operational Risk: Failures in systems, processes, or human error.

Key terms: Credit Risk

Market Risk: Changes in Interest Rates, FX Rates, and Prices

• Market risk arises from volatile interest rates, FX rates, and price changes.
• These fluctuations impact investment returns and funding costs.

Key terms: FX Rate

Credit Risk: Counterparty Default Risk

• Credit risk arises when counterparty fails to fulfill financial obligations.
• Critical in treasury operations where transactions depend on counterparties.
• Evaluating counterparty creditworthiness is essential.
• Tools: credit ratings, risk analysis models.
• Exposure typically managed using limits and guarantees.

Key terms: Credit Risk

Liquidity Risk: Inability to Meet Short-Term Obligations

• Liquidity risk is the inability to meet cash obligations on time.
• Typically caused by sudden withdrawals, market disruptions, or funding shortages.
• Can lead to financial instability or even a bank run.
• Requires immediate funding for short-term survival.
• Liquidity gap analysis helps manage short-term risks.

Key terms: Liquidity Gap Analysis

References

• Basel Committee on Banking Supervision. (2010). Basel III: A Global Regulatory Framework.
• Mishkin, F.S. (2019). The Economics of Money, Banking, and Financial Markets.
• Hull, J.C. (2018). Options, Futures, and Other Derivatives.
• Basel Committee on Banking Supervision. (2021). Basel Framework Regulatory Mapping.
• Mishkin, F.S. (2018). Financial Markets and Institutions.
• Hull, J.C. (2020). Risk Management in Banking Systems.
• Hull, J.C. (2019). Risk Management in Financial Institutions.
• Hull, J.C. (2021). Risk Management Techniques in Banking.
• Hull, J.C. (2021) Risk Management and Financial Institutions. 5th edn. Hoboken: Wiley.
• Mishkin, F.S. (2020) The Economics of Money, Banking, and Financial Markets. 12th edn. Hoboken: Pearson.
• Basel Committee on Banking Supervision (2011) Principles for Operational Risk Management.
• Iqbal, Z. and Mirakhor, A. (2011) An Introduction to Islamic Finance. Singapore: Wiley.
• BIS. (2013) Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools. Available at: https://www.bis.org
• BIS. (2014) Basel III: The Net Stable Funding Ratio. Available at: https://www.bis.org
• BIS. (2017) Stress Testing Principles. Available at: https://www.bis.org
• Basel Committee on Banking Supervision (2013) Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools. Bank for International Settlements.
• Hull, J.C. (2022) Risk Management and Financial Institutions. 5th edn. Hoboken, NJ: Wiley.
• Brunnermeier, M.K. (2009) Deciphering the Liquidity and Credit Crunch 2007-2008. Journal of Economic Perspectives, 23(1), pp. 77-100.
• Diamond, D.W. and Dybvig, P.H. (1983) Bank Runs, Deposit Insurance, and Liquidity. Journal of Political Economy, 91(3), pp. 401-19.
• Basel Committee on Banking Supervision (2010) Basel III: International framework for liquidity risk.