1. In March 2022, major Central Banks worldwide started increasing interest rates resulting in higher Treasury Bill yields and failure of few banks in US (due to selling of Assets to meet liquidity). Explain the role Treasury Policies & ALCO for liquidity management? (10 Marks)
Ans:
Introduction
Treasury management is crucial in the banking industry as it is responsible for maintaining institutions’ financial stability and liquidity. Bank asset and liability management involves implementing various techniques and policies to efficiently oversee a bank’s assets and liabilities to maximize profitability and minimize risks.
The recent surge in interest rates implemented by prominent central banks has substantially affected banks’ liquidity positions. As interest rates grow, the returns on Treasury Bills also rise, making them more appealing investment choices for banks. Nevertheless, an increase in T-bill rates might result in a decline in the market value of current bond investments, impacting banks’ financial positions.
Conclusion
Ultimately, treasury management is essential for preserving institutions’ financial well-being and stability. The recent surge in interest rates and the collapse of certain banks in the US highlights the significance of solid treasury policies and efficient ALCO governance.
2. A British MNC in India want to move their Corporate Treasury to Head Office in London for better liquidity management. Explain what are the considerations when choosing the location to setup a Corporate Treasury office? (10 Marks)
Ans:
Introduction:
Corporate treasury management is an essential financial management component for multinational corporations (MNCs), especially in the banking industry. Financial management entails strategically overseeing a company’s financial resources, debts, and potential hazards to guarantee the most advantageous liquidity, funding, and investment choices.
Concept and Application:
Regulatory Framework: Treasury activities are greatly influenced by the regulatory environment. As a prominent international financial center, London provides a robust regulatory environment with explicit guidelines for treasury activities. The stability and predictability mentioned are essential for efficiently managing financial risks.
Market Access and Connectivity:London has exceptional market access and connectivity, granting unrivaled entry to worldwide financial markets, encompassing foreign exchange, money markets, and capital markets. This enables multinational corporations (MNCs) to enhance their liquidity management strategies by facilitating efficient fundraising, investing, and hedging activities.
Conclusion:
To relocate a corporate treasury office from India to London, it is crucial to thoroughly evaluate multiple factors such as the regulatory framework, market accessibility, financial infrastructure, tax consequences, risk management, availability of skilled workforce, currency considerations, cost implications, strategic compatibility, and political-economic stability.
3. In view of settlement risk and increasing interest rates, explain the following
4. What is Herstatt risk? (5 Marks)
Ans:
Introduction:
Treasury management in banking involves employing various techniques and practices to handle a bank’s financial assets and liabilities efficiently. This includes effectively managing liquidity, interest rate, and settlement risks. Of all the dangers, Herstatt risk is particularly worrisome for banks involved in foreign operations, significantly when interest rates are rising.
Concept and Application:
Herstatt risk, named after the German bank Bankhaus Herstatt, pertains to the potential failure of settlement in foreign exchange transactions caused by disparities in time zones. It happens when one party involved in a foreign exchange transaction meets its responsibility to make a payment in a specific currency. Nevertheless, the counterparty must provide the specified quantity in the alternative currency. This failure commonly occurs due to a time lag between the two stages of the transaction, which is caused by disparities in the operating hours of the payment systems or financial institutions involved.
Conclusion:
In summary, Herstatt risk presents a substantial obstacle for banks involved in global operations, especially in the face of rising interest rates and changing market conditions.
5. How Assets and Liabilities are considered Rate Sensitive? (5 Marks)
Ans:
Introduction
Treasury management in banking refers to strategically managing a bank’s assets and obligations to assure the bank’s liquidity, profitability, and effective risk management. An essential component of treasury management involves comprehending the impact of interest rate fluctuations on assets and obligations, particularly in the context of rising rates and settlement risk.
Concept and Application
Interest rate sensitivity pertains to the extent to which the value of financial instruments, such as assets and obligations, alters in reaction to variations in interest rates. Sensitivity to interest rate fluctuations is paramount for banks, as it can significantly affect their profitability, risk exposure, and overall financial well-being.
Conclusion
Understanding the impact of interest rate changes on assets and liabilities is crucial for efficient treasury management in the banking sector, especially when interest rates increase and settlement is dangerous.
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