Treasury-AlmHard

3 min read · 566 words

What the seat actually does

A bank borrows short and lends long. Somebody has to fund that, price it, and decide how much of the mismatch the bank is willing to run. That seat is treasury, and asset-liability management is the name for the second half of it.

It sets the internal price of money. Every loan desk is charged for the funding it uses and every deposit business is credited for the funding it brings, at a rate treasury publishes. Get that curve wrong and the bank grows exactly the business it should not — which is why transfer pricing is a genuinely consequential piece of internal arithmetic rather than an accounting formality.

• Funding — deposits, wholesale borrowing, covered bonds and repo. See covered bonds and repo.
• Liquidity — the buffer of assets that can be sold or pledged on a bad day, and the rules governing its size.
• Interest rate risk in the banking book — the mismatch itself, hedged with swaps.
• Capital, alongside the finance function: what the bank holds against what it has lent.

A day, and where it goes

• The cash position, currency by currency, and what has to be borrowed or placed before the market closes.
• The curve. What funding costs at each maturity, and therefore what every desk is charged today.
• Ratios. Liquidity coverage and stable funding against the regulatory floor, which is a daily number rather than a quarterly one.
• Hedges — what the banking book's rate sensitivity is now, and what has to be traded to keep it inside the limit.

What it is measured on

• Cost of funds against peers and against what the business was priced at.
• The regulatory ratios, which are pass-or-fail rather than ranked.
• Net interest income sensitivity — what the bank earns if rates move a hundred basis points either way.
• Whether the buffer was liquid on the day, which is only ever tested once.

What it touches on this site

• The instruments — covered bonds, repo, CDs and interest rate swaps.
• The curve it lives on — the yield curve and how one is built.
• Where the deposits come from — deposits and payments, and where they go, mortgage lending.
• When it goes wrong — 2023, a bank undone by the mismatch it was supposed to manage, and 2007, undone by where it funded itself.

How it goes wrong

• Funding long assets with the shortest money available, because it is the cheapest, right up until it is not available.
• A buffer that is liquid on paper. Assets that can be sold in a normal market are the ones everybody sells in an abnormal one.
• Transfer pricing that lies. Charge the wrong curve and the bank is subsidising exactly the lending it should be discouraging.
• Hedging the accounting rather than the risk, or the other way round, and discovering the difference at the reporting date.

Concepts to master

• Duration applies to a balance sheet, not only to a bond — assets and liabilities each have one, and the gap is the position.
• A deposit has a modelled life, and the model is the single biggest assumption in a bank.
• Liquidity and solvency are different failures that look identical from outside. See liquidity.
• The policy rate is the input — see monetary policy.