Answer to Question #264144 in Finance for Kajal

Question

Historically, only larger Banks had the strength of providing Treasury products & services. Now even smaller banks are into it in a strong way. Enumerate and describe at least 5 purposes for which a Bank Treasury exists 

Answer 1

a.Asset Liability Management

The bank's Treasury's main task is to ensure that its assets are in all respects consistent with its liabilities. The Treasury's job is to create different financial models that help banks predict the level of net interest income they generate in different economic scenarios.

b.Liquid Investments in Government Securities

The bank's treasury is also responsible for maintaining certain portions of its portfolio of highly liquid government securities. This is because, in countries such as the United States, banks act as broker-dealers to the government and must hold these securities before they can be sold. In other countries, such as India, banks are required by law to maintain a certain percentage of their portfolios in floating government securities. This ensures the safety of bank portfolios while creating a highly liquid government securities market.

c.Capital and Reserve Requirements

Since the Treasury is generally responsible for the bank's balance sheet, it is also responsible for building reserves to meet the minimum reserve requirements set by the central bank.

d. Liasioning with Regulatory Bodies

The treasury department of banks is very closely managed. Since they are the ones responsible for maintaining capital adequacy ratios and reserve ratios, they are also the ones who must liaise with the regulatory authorities on these matters.

e.Disaster Management

The financial operations of all banks are responsible for managing their operations in the event of a disaster. Therefore, to prepare for this, the Treasury must anticipate the risks that may materialize over time. The Ministry of Finance is responsible for using instruments such as derivatives to hedge banks' exposure to various types of risk.