What does it take to build

and manage a Treasury

Department?AMInstitute Finance & Risk Forum – November 2012

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 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 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

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 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

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

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 Timing debatable – depends on workload of CFO Having right skills assists at subsequent stages

Heritage experience Skill set required defined by business

priorities:

1. Securitisation2. Capital management3. Funding & debt issuance4. Liquidity management5. 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 Treasurer reporting to CFO Business risk appetite required separation of

duties Treasury functions existed but no framework

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

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 Structure dictated by business needs Processes evolve as priorities change & skills sets

develop

Heritage experience1. Dealing – 3 staff

Day to day liquidity management & investment activities Market interface & pricing input Debt issuance & hedge execution

2. Structured Finance – 2 staff Securitisation issuing & maintenance Term debt issuing & program maintenance

3. Financial Risk Management – 2 staff Balance sheet forecasting, hedging strategies & scenario

testing Key financial metrics & analysis

4. Settlements – 2 staff Austraclear, Swift, ASL etc.

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Financial Risk Management

Structured Finance

Dealing team

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

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 frameworkHeritage experience Basic requirements first – workflows set up in

Excel Day to day liquidity streamlined Financial risk management recalibrated Securitisation structures created & administration simplified Back office formalised and capabilities augmented

Operating framework developed over time Board policies written for capital, liquidity, financial risk Settlement capabilities upgraded

Infrastructure developed as sophistication grows 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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12 years agoSpreadsheets

Now

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Treasury deal capture

Hedge Accounting

Deal Confirmation

and settlement advices

Monitoring credit

exposures

Scenario Analysis

Gap Reporting

Sensitivity (PVbp)

Value at Risk

IMB Experience - Systems

Treasury ALM

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IMB Experience - Systems

Treasury deal capture

Hedge Accounting

Deal Confirmation

and settlement advices

Monitoring credit

exposures

Scenario Analysis

Gap Reporting

Sensitivity (PVbp)

Value at Risk

EaR/NIM

Credit Analysis

Cashflow/ Liquidity

Funds Transfer Pricing

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 issuesHeritage experience Learning to manage the balance sheet

Balancing competing interests of liquidity/capital/NIM

Good back office is critical Must commit resources to electronic payments channels

Develop an investor base that supports the business Sustainable funding = $3 of potential funds for every $1

invested

Understand the importance of refinance risk Successful deals are only good if they can be refinanced

It’s a merry-go-round with no finish line Continual search for improved performance Ongoing refinement of processes, skills & outputs22

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

Summary Establishing a Treasury Department requires

commitment & resources Benefits include:

Funding mix diversity – NIM stability Better focus = better governance Sophistication & skills in key financial operations Market profile & credibility

Difficulties include: 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

Depends on what you want to do, the size of your organisation, short term vs long term view

You learn more doing it yourself

Brokers You need to control your direction and not be talked into something the

Broker wants you to do just because others are doing it Use them to help your business - Do not let them run your business Investing in FRN’s (credit risk - Europe, liquidity risk, capital loss?) “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

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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