What does it take to build and
manage a Treasury Department?
AMInstitute Finance & Risk Forum – November 2012
Why build a Treasury?
 Economic environment has changed
 Drive for assets replaced by focus on funding
 Competition for retail funding increased
 NIM volatility
 Existing Treasury arrangements not meeting needs
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Limited focus means no pricing power/higher cost
No control/options over innovation
Poor service from support providers
No identity/independence
 Independent Treasury function provides opportunity
for funding diversity
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Why Build a Treasury?
 Greater focus on Managing Risk by APRA, Boards and
Management
 Specialist area – you need expertise
 To provide information on interest rates, the financial
markets and the economy to other departments,
management and the Board – for key business decision
making
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What does a Treasury do?
 Treasury is a service provider for the business
 A business’ risk appetite determines role of Treasury
 Treasury as a core business function for ADIs
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Liquidity Management – cash flow management & investing
Financial Risk Management – NIM, pricing & hedging
Capital Management – cap adequacy, hybrids
Debt issuing – refinancing & funding
 Treasury can also be a profit centre
 Buy and sell financial instruments e.g. bonds, swaps/options
 Trade market exposures
 Provide intermediary services for internal & external
stakeholders
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What does a Treasury do?
Manage Risks

Identify, Quantify & Manage (Hedging)
 Liquidity
 Funding Plan, Daily cashflow, Liquidity Investments (Securities,
Duration, Counterparties)
 Market
 Gap, VaR, EaR, NIM
 Credit
 Treasury Counterparties, large exposures
 Capital Management
 IMB Structure
 Securitisation
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What does a Treasury do? cont.
 Minimise Risk
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IMB Treasury only uses hedging to reduce positions
IMB Treasury does NOT trade
IMB Treasury does use Balance Sheet Positioning
e.g. you want to be long fixed assets in a falling interest rate environment (loans &
investments)
you do not want to be long fixed assets in a rising interest rate environment
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How do you set up a Treasury?
Approach will differ depending on circumstances but
likely to require the following key milestones:
1. Gain support of key decision-makers
2. Acquire skills
3. Define responsibilities
4. Determine structure
5. Build infrastructure & operating framework
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1. Support of decision-makers
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Treasury not core retail – clear objectives essential
Significant commitment of time & money required
Requires a “champion” & Board support
Heritage experience
 No Treasury function
 Business model changed
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Asset growth funded by Securitisation
Liquidity & capital pressure
Securitisation warehouse filling up – Plan B?
Treasurer hired within 6 months
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IMB Experience
 IMB Treasury has always had strong support from
management and the Board
 Gradual evolution
 IMB Treasury established early 1990’s
Small team – 4.2 FTE (Treasury liquidity investments – 2.2 FTE and funding
– 2FTE) reporting to CFO
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I replaced Manager Treasury in 2000
Implemented Treasury system in 2002
Securitisation first issue 2003
Risk Management brought in house in 2005
Expanded into other areas e.g. debt funding, capital
instruments
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2. Acquire skills
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Timing debatable – depends on workload of CFO
Having right skills assists at subsequent stages
Heritage experience
 Skill set required defined by business priorities:
1.
2.
3.
4.
5.
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Securitisation
Capital management
Funding & debt issuance
Liquidity management
Financial risk management
Treasurer hired – previously Capital Markets Dealer
& Securitisation Manager at BoQ
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IMB Experience
 Gradual evolution
 Business case (cost/benefit analysis) to employ
additional staff to enhance treasury team
 I had a trading background
 I had to learn new skills - securitisation, interest rate risk
management
 You don’t always need to buy staff, you can train
internally
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3. Define responsibilities
Heritage experience
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Treasurer reporting to CFO
Business risk appetite required separation of duties
Treasury functions existed but no framework
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Liquidity, investing & financial risk managed in Accounts
Limited issuing undertaken – subordinated debt
Governance thin – no Board policies for Treasury
Treasury created as a distinct department
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Immediately assumed existing processes
Back office within Accounts
Settlement processes separate but complimentary
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IMB Experience
 Clear segregation of duties
 Front Office, Back Office (Settlements), Middle Office
 Policies and Procedures
 Develop over time
 Reporting lines
 Treasurer reports to CFO
 Governance
 Committees – ALCO, Pricing
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4. Determine Structure
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Structure dictated by business needs
Processes evolve as priorities change & skills sets develop
Heritage experience
1. Dealing – 3 staff
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Day to day liquidity management & investment activities
Market interface & pricing input
Debt issuance & hedge execution
2. Structured Finance – 2 staff
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Securitisation issuing & maintenance
Term debt issuing & program maintenance
3. Financial Risk Management – 2 staff
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Balance sheet forecasting, hedging strategies & scenario testing
Key financial metrics & analysis
4. Settlements – 2 staff
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Austraclear, Swift, ASL etc.
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Dealing team
Structured
Finance
Financial Risk
Management
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IMB Experience
Need to consider:
 What markets do you want to be in? – Middle markets, Capital
markets, Securitisation, Broker
 This will help determine: no. of staff, level of knowledge/experience
you need
 Outsourcing
 Risk, Liquidity Investments, Settlements
 Cost/Benefit analysis
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IMB Experience
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Dealers – 3 FTE
BDM’s – 3 FTE
Risk – 1 FTE
Settlements (Back Office) – 1 FTE
Accounts (Middle Office) – 1 FTE
Securitisation
 Issued by Treasury but maintained by Accounts (Middle Office)
Need to consider:
 Do you buy vs. Do you train?
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5. Build infrastructure & operating framework
Heritage experience
 Basic requirements first – workflows set up in Excel
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Operating framework developed over time
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Day to day liquidity streamlined
Financial risk management recalibrated
Securitisation structures created & administration simplified
Back office formalised and capabilities augmented
Board policies written for capital, liquidity, financial risk
Settlement capabilities upgraded
Infrastructure developed as sophistication grows
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Workflow management system acquired – limit control, separate activities
Balance sheet management system – value add through analysis
Funding strategy evolving – Credit ratings, debt program, new deals
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IMB Experience - Systems
12 years ago
Now
Spreadsheets
Treasury
deal capture
Monitoring
credit
exposures
Deal
Confirmation
and settlement
advices
Hedge
Accounting
Value at
Risk
Sensitivity
(PVbp)
Scenario
Analysis
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Gap
Reporting
IMB Experience - Systems
Treasury
Treasury
deal capture
Monitoring
credit
exposures
ALM
Deal
Confirmation
and settlement
advices
Value at
Risk
Hedge
Accounting
Scenario
Analysis
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Sensitivity
(PVbp)
Gap
Reporting
EaR/NIM
Funds
Transfer
Pricing
Cashflow/
Liquidity
Credit
Analysis
Capital
Modelling
Prepayment
/Repayment
IMB Experience
 Systems evolved over time – gradual process
 Straight Through Processing (Front Office to Back Office)
 Complete Balance Sheet picture requires all data
(Treasury and Retail)
 IT Knowledge
 Outsourcing
 Do you Buy vs. Do you Rent
 Cost/Benefit Analysis
 IMB Risk Management experience
 We wanted knowledge in house
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Ongoing management issues
Heritage experience
 Learning to manage the balance sheet
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Good back office is critical
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Sustainable funding = $3 of potential funds for every $1 invested
Understand the importance of refinance risk
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Must commit resources to electronic payments channels
Develop an investor base that supports the business
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Balancing competing interests of liquidity/capital/NIM
Successful deals are only good if they can be refinanced
It’s a merry-go-round with no finish line
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Continual search for improved performance
Ongoing refinement of processes, skills & outputs
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Challenges
 Regulation/Compliance
 VaR/EaR ex.
 Costs
 Capital, Liquidity,
 “Deposit War”
 Majors attack on Retail deposits - Core funding of mutuals
 Funding Diversification
 Sources, Duration
 Balance Sheet Management
 All risks together
 “Best Practice” – bar is a lot higher now
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New Funding Paradigm
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Summary
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Establishing a Treasury Department requires
commitment & resources
Benefits include:
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Funding mix diversity – NIM stability
Better focus = better governance
Sophistication & skills in key financial operations
Market profile & credibility
Difficulties include:
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Costs versus return
Finding the right skill set
Market volatility e.g. credit rating
Ongoing stakeholder management
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Summary
 Structure
 Staff
 Systems
 Cost/Benefit
 Costs will increase
 Some benefits are unquantifiable
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Comment
 Must consider the use of Brokers, Advisers and
Consultants
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Depends on what you want to do, the size of your organisation, short term
vs long term view
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You learn more doing it yourself
 Brokers
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You need to control your direction and not be talked into something the Broker wants
you to do just because others are doing it
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Use them to help your business - Do not let them run your business
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Investing in FRN’s (credit risk - Europe, liquidity risk, capital loss?)
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“don’t be tempted into new products to boost profitability unless you understand the
risk and have the skill set to manage” Stephen Glenfield – CDO’s
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Borrowing from professional clients – “hot money”
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Cont.
 APRA – Supervise for Risk
Liquidity – liquid asset, credit risk, HQLA return?
 The market is always right?
 NCD’s – issued at margin over BBSW
 Develop a Treasury Markets Culture
 Have a view/opinion
 Talk to each other/deal with each other
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