The Treasury function of all corporations is a key management unit of the organization. It is responsible for managing an entity’s liquidity risk, funding and interest rate risk as well it may also be charged with managing the entity’s foreign currency risk and capital management risk.

Liquidity risk stems from 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 risk if it has foreign currency income and expenses, foreign currency receivables and payables or has capital in foreign subsidiaries held in local currency. Lastly, capital risk is a function of managing its capital relative to any capital requirement and management targets.  

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. The skills required to effectively manage the treasury function are many as well as the tools that are used in the management of the function. 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 are faced with many of the above-referenced risks and must undertake many of same management processes to manage their risks.

The Treasury function is one of the most important units within the bank and nonbank corporations alike. Treasury management can be very complex in nature and, given the size and nature of an organization’s balance sheet, it can be one of the most demanding areas of management within the firm. This presentation provides for a thorough understanding of the Treasury Management function, each area of risk under Treasury management, the thought process for addressing each area of risk and the tools as well as the disciplines used to manage these risks. It focuses on the many functional management considerations relative to each area of responsibility under Treasury management as well as on the management information process that provides for a firm’s executive management with the ability to focus on and understand these risks as well.  

Contained in the presentation are also model reports which are used by the treasury function to manage the firm’s liquidity risk and its interest rate/interest maturity risk. Another part of the presentation addresses the use of derivatives in managing the firm’s interest rate risk.