Treasury management June 2024

Description

Treasury Management in Banking

June 2024 Examination

 

 

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 1.

Introduction:

The dynamics of central bank policies, particularly regarding interest rates, have significant ramifications for financial institutions, especially banks. The period starting from March 2022 witnessed a pivotal shift as major central banks globally commenced a cycle of interest rate hikes. This led to an upward surge in Treasury Bill yields, impacting various sectors of the economy, particularly the banking sector. Concurrently, the repercussions of these actions included the failure of several banks in the United States, attributed partly to liquidity constraints exacerbated by the necessity to sell off assets. In this context, the role of Treasury Policies and Asset Liability Management Committee (ALCO) becomes paramount. Treasury Policies guide a bank’s approach to managing its liquidity, while ALCO serves as a strategic body overseeing risk management, including liquidity risk. This essay will delve into how these mechanisms functioned in addressing the liquidity challenges faced by banks amidst the changing interest rate environment and the fallout of asset

 

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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 2.

Introduction:

The decision to relocate a Corporate Treasury office involves a multitude of considerations, ranging from regulatory environment and market access to operational efficiency and strategic objectives. In the case of a British Multinational Corporation (MNC) contemplating the transfer of its Treasury function from India to its Head Office in London, various factors come into play. London, as a global financial hub, offers numerous advantages in terms of liquidity management and access to financial markets. However, the decision must be weighed against several considerations to ensure optimal outcomes for the MNC. This essay will delve into the key factors that need to be taken into account when choosing the location to set up a Corporate Treasury office, focusing on the specific context of

 

 

3. In view of settlement risk and increasing interest rates, explain the following:
4. What is Herstatt risk? (5 Marks)

Ans 3a.

Introduction:

Settlement risk poses a significant challenge to financial institutions, particularly in environments characterized by increasing interest rates. Among the various forms of settlement risk, Herstatt risk stands out as a notable concern. This essay aims to elucidate the concept of Herstatt risk in the context of settlement risk and the implications of rising interest rates on its prevalence and mitigation strategies.

Concept and

 

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1. How Assets and Liabilities are considered Rate Sensitive? (5 Marks)

Ans 3b.

Introduction:

Understanding the rate sensitivity of assets and liabilities is crucial for effective asset-liability management (ALM) in financial institutions. Rate sensitivity refers to the degree to which the value or cash flows of assets and liabilities change in response to fluctuations in interest rates. This essay aims to elucidate how assets and liabilities are considered rate-sensitive and the