What is Treasury Management & Why is it Important?

Financial headlines spell out the importance of treasury management, sometimes with cautionary stories about treasury mismanagement. The treasury management role is not only crucial for big commercial banks but also for small banks and the startups that do business with banks. But let’s focus on banking. 

Calling treasury managers “professional devil’s advocates,” a recent opinion piece in Forbes said all banks need to hire an active and aggressive treasury manager to avoid repeating the fatal errors of Silicon Valley Bank or the First Republic. “Founded to meet the needs of VCs,” SVB was hobbled by interest rate changes, spelling doom for the commercial bank without enough liquidity to cover fast-moving withdrawals. As the saying goes, hindsight is always 20/20, but we will make the following statement anyway. Investment risk in the above cases could have been better managed through what some call the indispensable role of a treasury manager. 

So, what is treasury management at a bank? The treasury management role in banking might just be the most critical role for the health of the organization. Let’s discuss why and why some have called on treasury managers to be both active and aggressive. 

What is treasury management in banking?

Think big. Treasury management deals with large sums of cash. The person or department will act like an advisor to the organization. Their credibility and importance come from their ability to keep a bank in top financial health, strong enough to cover enough of its liabilities with assets, especially in the event that a crisis should occur, and flexible enough to keep moving in an ever-changing economic landscape. 

Their work directly impacts a bank’s reliability in the eyes of customers and the perception of excellence in the field of banking. Since regulators often trust banks to their own evaluations and assessments, the treasury management arm of a bank should not assume that federal agencies will let it know when things are in order. Instead, they have to police themselves. 

Treasury management may often take the form of multiple people on a team. They will both share their work and findings with essential decision-makers at the bank, and they will also become the liaisons for regulatory agencies for the bank. Notwithstanding our above statement about regulators, they can still be expected to demand specific actions and standards of financial behavior from banks. 

Management teams are future-oriented but must also have a firm grasp of the past. That’s because they are trying to predict what might happen in the future and how a bank can continue to grow if growing is the goal. Some banks, such as Wells Fargo, have been asked not to grow by regulators. In that case, Wells Fargo was told that its balance sheet should remain unchanged after it got into trouble for using current customer information to create accounts that did not necessarily cost the customer anything but were never authorized by the customer themselves. Treasurers can help with that goal, too. 

Importance and Benefits of Treasury Management

Banks are a business, first and foremost, much like any other. They must have enough assets to stay in business relative to their debts, and when they do not, they imperil their customers and themselves. Treasury management is a cornerstone of any successful bank’s efforts to thrive, just as it can help any large organization succeed as well. 

Treasury management has many benefits, not just to the bank but to the overall economy, locally and sometimes globally. That is because of the increasingly interconnected nature of the modern-day financial system. 

Loans and Deposits

The treasury touches lives. Everyone from the local ice cream maker to the construction company might turn to the bank for a business loan. Every day, people will ask for loans to improve homes or buy one. The bank treasury will help the bank decide how many loans to make and how many new deposits it needs. Treasury predictions and models go into this decision made by people who rely on the treasurer’s accuracy and ability to synthesize quick changes and ideas. 

Capitalization and Leveraging

Treasuries will prevent undercapitalization and overleveraging with their active participation in managing a bank’s assets and liabilities. Essentially, the management team can help make sure that books are balanced. Too much debt is bad news because it exposes the bank to situations that could rock its foundations, such as a change in interest rates. 

Transactional and Strategic Management

A good treasury will keep an eye on daily cash flow and long-term goals for a bank. How should a bank go about ensuring a great return on investments? 

Foreign Exchange (FX) Risk

Will the bank invest in other currencies, monitor fluctuations, and hedge with other investments? A good treasury department will understand how to use many varying tools to reach the bank’s goals. 

Long-term Stability 

One essential function of a bank treasury is to foresee risk and plan for ways the bank would survive a crisis. The effects of these findings will impact preparedness, processes chosen, and resource allocation. 

Lower Risk

All of the above responsibilities help define the bank’s risk management strategy. 

Functions of Treasury Management

To manage daily cash flow, the treasury needs to see the up-to-the-moment movement of funds from and to bank accounts. The manager or team will balance investments and liquidity as well as keep an eye on risk management and assets and liability management (ALM). A bank’s assets can include any interest-bearing loans and mortgages, equity, reserves, money market accounts, securities, cash, and even the bank’s physical property. The treasury will forecast many possible economic outcomes affected by interest rate changes and much more. Thus, the treasurer will predict how future shocks could impact the bank.

Balance sheet management (BSM) allows banks to satisfy regulations introduced after the 2008 financial crisis aimed at creating more robust banks. You may remember how, way back in 2004, the Securities and Exchange Commission allowed five investment banks to move money from their reserve accounts, held there to comply with regulations and invest in mortgage-backed securities. The banks? Goldman Sachs, Lehman Brothers, Bear Sterns, Merrill Lynch, and Morgan Stanley. The changes to net capital rules then, unfortunately, allowed those banks to end up playing a massive role in the ensuing worldwide economic disaster. 

This critical treasury function for balance sheet management will keep capital adequacy ratios (CAR) in mind, which is seen as a significant indicator of the health of a bank and its strength. Tier 1 and tier 2 capital is measured and divided by assets in this ratio, which is designed to indicate a bank’s ability to withstand certain pressures, ideally helping banks avoid the weakened positions of overleveraging and undercapitalization. These regulations fall to the treasury to stay abreast of and report the bank’s ability to meet the standards of regulatory agencies. A treasury’s good relationship with regulators can help it lobby against measures that would affect the bank negatively. 

The treasury should also ensure that any cash the bank has is invested in the best vehicles for the growth of its funds. While specific reserve requirements must be met, the money held in reserves should not exceed requirements when interest can be generated by reserves invested elsewhere. 

Not least, disaster preparedness means the bank has a sort of go-bag of tools to help it manage any disasters that may arise. These tools are chosen and readied by the treasury. While day-to-day operations may mean communicating with branches about customer loan availability, a crisis could mean that treasurers feel more like life jackets sent to keep the bank afloat.