The Treasury function of all corporations is a key management unit of an organization. It is responsible for managing an entity’s funding, liquidity risk and interest rate risk as well it may engage in foreign currency transactions as a source of swap funding.
Liquidity risk stems from the management of a firm’s asset creation and funding capabilities. Its interest rate risk is a function of the interest maturity structure of its assets relative to the maturity structure of its liabilities. This interest rate risk for a bank is referred to as its interest maturity risk.
A firm may have foreign exchange activity as it engages in the swapping of foreign currencies to generate home currency funding.
The treasury function has a major role in managing the balance sheet of a business and has a management process that involves an ongoing set of daily roles and responsibilities to meet its objectives. The skills required to effectively manage the treasury function are many as well as the tools that are used in the management of its functions. The treasury unit must work closely with those units of the organization which have the responsibility in creating assets and it plays an important role in the pricing of interest-rate sensitive assets. In addition, in the case of a bank, the treasury function may also be commissioned to generate net interest income (NII) for the firm from its management of the firm’s interest rate maturity structure.
Although there are dedicated persons within the treasury function who manage these referenced responsibilities, it is necessary for the senior and executive management of the firm to know and understand the makeup of its balance sheet, the risks that are present and how the risks are being managed. This presentation will focus primarily on a bank’s Treasury function, but the treasury function of nonbank corporations is faced with many of the above-referenced risks and must undertake many of same management processes to manage their risks.
