The Changing Role of a Bank's Treasury

• DOI: http://doi.org/10.1111/ajfs.12196
• Date: 01 December 2017
• Published date: 01 December 2017

The Changing Role of a Bank’s Treasury

Paulina Roszkowska*

Hult International Business School, San Francisco, United States and Warsaw School of Economics, Poland

Lukasz Prorokowski

H. L. Prorokowski LLC, Risk Management Consultancy, United States

Received 8 November 2016; Accepted 11 July 2017

Abstract

This study investigates the contemporary role of banks’ treasuries and shows how the trea-

sury function is being transformed across the banking sector. Using a sample of international

surveys of banks representing both emerging and advanced markets (with 35% of banks rep-

resenting the Asia–Pacific region), we analyze the current and future challenges faced by trea-

suries. Including the Asia–Pacific banks in the analysis enables comparison of how the

treasury departments differ in their search of revenue diversification under the conditions of

tighter credit and liquidity, and what are the problems associated with treasury products

offering as part of the revised strategies.

Keywords Bank’s treasury; Financial regulation; Interest rates; International financial market

JEL Classification: G15, G21, G28

1. Introduction and Study Background

Treasury function in financial institutions is decidedly more complex today than in

its original arrangement, and in comparison with its corporate counterparts. This

study investigates the recent evolution of banks’ treasury function, and addresses a

question about the role of the contemporary bank’s treasury that will prevail over

the next years.

Treasury emerged in the 1980s as a distinct function separate from mainstream

finance. Treasury departments were often regarded as profit centers, as they were

designated to use a company’s financial resources to generate profits (Helliar and

Dunne, 2004). In the 1990s, treasuries were transformed into cost centers with the

primary aim of cash management, funding, financial exposure hedging, and in-

house banking. Implementation of corporate governance regulation (United States

*Corresponding author: Paulina Roszkowska, Hult International Business School, 1355

Sansome St, San Francisco, CA 94111, USA. Tel: +1-415-528-0977, Fax: +1-415-869-2900,

email: proszkowska@gmail.com.

Asia-Pacific Journal of Financial Studies (2017) 46, 797–823 doi:10.1111/ajfs.12196

©2017 Korean Securities Association 797

Sarbanes–Oxley Act, 2002) shifted the evolution of treasuries towards the “con-

trolled treasury” function that is characterized by documenting financial workflows

and key controls (Higdon, 2012). In the aftermath of the global financial crisis of

2007–2010, a transformation in the direction of so-called performance treasuries

has been observed by Weiss et al. (2015), with the profit and loss (hereafter

“P&L”), and other new responsibilities assigned to treasurers.

In the banking sector, where excessive operational risk exists, the role of treasury

departments has been even more elevated. A treasury function has been established

at every major bank and financial services firm, primarily for the purpose of

“managing short-term funding (mainly up to one year), including intraday liquidity

management, cash clearing and crisis liquidity monitoring” (Kallur, 2016, p. 313).

In other words, a treasury department monitors, reports, and forecasts cash inflows

and outflows to bank’s business activities, while ensuring that the bank remains sol-

vent and any excess cash is effectively invested. The efficiency of such investments is

conditioned on two factors. Firstly, a treasury department assesses the rates of

return from allocating excess cash to various types of investments. Secondly, the

treasury analyzes the time it takes to convert these investments back into cash

(Bragg, 2015). The importance of the treasury function is underscored by Lang-

worth (2012), who compares the treasury to the heart of a bank managing its

finance. In other words, treasury function ensures that the bank remains financially

stable. This is especially important in the aftermath of the global financial crisis that

triggered the need for a better understanding of the capital, liquidity, and regulatory

implications of banks’ trading activities.

Hewlett (2011) argues that banks’ treasuries should be positioned at the center

of corporate strategic planning. Interestingly, Hollein (2010) argues that, with

respect to the new responsibilities, banks’ treasurers have become chief liquidity

officers who participate in the overall financial management. Chaffai and Dietsch

(2015) argue that the new P&L responsibilities assigned to banks’ treasuries result

from material and abrupt changes in banks’ activities. Mercieca et al. (2007), Lepe-

tit et al. (2008), and Bian et al. (2015) link the new P&L resp onsibilities to the

changing dynamics of income generated from non-interest banks’ activities and

products. Complementing these findings, Kohler (2015) posits that treasury man-

agement coupled with other transaction-related services is the primary non-interest

income of investment-oriented banks. However, as noted by Hidayat et al. (2012)

and Pennathur et al. (2012), fostering the non-interest income of the Asia–Pacific

banks contributes to the financial risk among small and medium banks. Against this

academic background, we investigate if banks’ treasuries have a P&L responsibility

and, if so, what is the structure of P&L responsibilities (e.g. inclusion of the growth

target). Additionally, we focus on the options of the funding structure pursued by

the treasuries with attention paid to revenue diversification sources under the cur-

rent macro conditions. Treasury function in financial institutions has always been

exposed to more challenges than in typical corporate firms. In the aftermath of the

P. Roszkowska and L. Prorokowski

798 ©2017 Korean Securities Association