China’s Predatory Lending
February 12, 2025
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Modern banks are huge entities employing thousands of people in their workforce. However, amongst the various departments present at banks, treasury department is the most important as well as the least understood. In this article, we will provide a brief overview of these treasury operations.
The primary function of the treasury department of any banks is to ensure that its assets match its liabilities in every possible way. It is the job of the treasury department to prepare various financial models which help on forecasting the amount of net interest income that the bank stands to make if different economic scenarios play out. It is also the job of the treasury department to predict exactly how sensitive this non-interest income is to external shocks like changes in the interest rate.
The treasury department collates this critical information and then passes the same on to decision makers who then decide the kind of assets that they want on the banks balance sheet. These decisions are then further translated into loan targets which bank officials have to meet. Also, based on the information received from the treasury, the bank refrains from using certain kinds of deposit liabilities. Hence, treasury department profoundly influences both deposit taking and loan sanctioning functions of the bank.
Since the treasury department is basically in charge of the bank’s balance sheet, it is also responsible for setting aside reserves to meet the reserve requirements prescribed by the Central Bank. Also, the capital requirements prescribed by the Basel norms have to be met. Failing to meet these requirements has detrimental consequences since penalties are levied by the Central Bank. At the same time, holding an excess amount in reserves provides no benefit since such amount does not earn interest at the market rate and therefore represents opportunity loss for the bank.
The treasury department of banks is highly regulated. Since they are the ones that are supposed to maintain the capital adequacy ratios and reserve ratios, they are also the ones that are supposed to liaise with regulatory agencies on such issues. Executives from the treasury department are usually invited by the government when decisions regarding the banking industry need to be made. Such executives also lobby on the industry’s behalf if adverse regulations are put into place.
Treasury departments at banks are also in charge of maintaining a certain portion of their portfolio in highly liquid government securities. In countries like the United States, this is done because the banks act as broker-dealers to the governments and are expected to hold these securities before they can be further sold. In other countries like India, banks are required by law to maintain a certain percentage of their portfolio in liquid government securities. This lends safety to the bank’s portfolio while simultaneously creating a highly liquid market for government securities.
The treasury operations of any bank are responsible for managing its operations in the event of a disaster. Thus, to be prepared for the same, the treasury department has to anticipate the risks that can materialize over time. The treasury department is responsible for using tools such as derivatives to hedge the bank’s exposure to different kinds of risks. The late 2000’s have seen the proliferation of credit derivatives in the market which allow the banks to hedge even their basic risk i.e. the risk of nonpayment by counterparties. Apart from that, treasury departments are also important for insuring all the physical assets, the destruction of which can have a material impact on the bank’s business.
Treasury departments also have to perform a lot of normal back-office activities. They are supposed to regularly communicate with their branches regarding the extent of deposits that have been taken and the extent of loans that can be made. They also have to liaise with Forex department and proprietary trading department to monitor the amount of risk that the bank can take in real time. At the same time, the treasury department is responsible for ensuring that all branches, as well as ATM’s, are well stocked with cash to meet the service levels.
When banks run out of cash, it severely affects their reputation. The treasury department conducts complex calculations to ensure that adequate amount of cash is available wherever required to avoid such situations.
The treasury department is, therefore, the heart of the banking industry. Executives working in this department get a bird’s eye view of the operations of a bank that are spread out over cities, nations and even continents. These executives understand the concept of cost of funds and oversee its application.
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