Treasury and Capital Markets

Our Treasury and Capital Markets service addresses all of the market and liquidity risk areas of the banking industry, including interest rate, currency and commodity products. The obvious connections between treasury operations and duties and the access to and management of Capital Markets activities have never been more tested than at the current time. Globally bank capital is, and will continue to remain, much in demand.

It became clear that a reduction in global liquidity emanated from the USA created the recent and ongoing "credit crunch". This impact on the world market liquidity, which for a while had seemed to be an infinite pool of available money, has had profound effects and raised both the profile and importance of treasury and market risk management. The unavailability of money on demand, always a theoretical risk, had become a real risk impacting all markets. Liquidity was the first victim and its affects are still being felt, with credit risk being the second victim. Regulators around the world have been working at tightening rules and regulations concerning liquidity ratios and the nature of the liquid assets that a firm needs to maintain.

The criticism of the banking industry was that it was unprepared for the magnitude of the crash when it came and led regulators around the world to ask the question how were banks testing the suitability of liquidity ratios and capital availability under extreme circumstances? Stress testing capital availability is not new. The theory of risk based capital has been embraced by many of the world's larger banks for some time. It was that regulators felt that the industry in many countries were too easy in their assessments of the scale of possible failure, failing to really address the impact of plausible stress events.

Strengthened requirements on institution's liquidity and market risk management have been implemented requiring model validation and improved behavioural analysis, for example. The revised liquidity guidance needs to be implemented with a firm's undertaking a gap analysis against current procedures and policies. The model validation requirements require someone independent of the model development to undertake the validation. This is all rather demanding and will require the input of industry expertise.

With regards to stress testing liquidity, regulators globally have taken the steps of suggesting liquidity ratios, based on the amount of instantly available money divided by the amount of money that might be required for a preset period (for example 30 days). These ratios would have to be continuously calculated on a daily basis so that each organisation would have to manage the liquidity ratio continuously.

These additional concerns have meant that banks need to develop a whole new approach to both capital and liquidity. It is the use of probabilities and the development of more sophisticated risk management techniques in conjunction with a more active involvement from treasuries with the management of the markets that will ensure banks remain safe in the future even under extreme circumstances.

There is also a move to change some of the market infrastructure to reduce systemic risk including the development of OTC derivative exchanges. This will change the nature and risk profiles of the products traded by the banks, impacting systems, controls and processes.

The markets are of course still open - each with its own risks and management techniques. The need to manage and provide capital and liquidity under new rules, taking into account extreme moves, will affect banks globally, particularly when looked at through the lenses of "Return on Capital'. Risk Reward consultants are experts in their industry with skills gained in major financial institutions across all areas of treasury and capital markets. Addressing treasury, asset and liability management, exchanges and their operations, models and their validation and the management of treasury and capital markets amongst a broad service offering we are able to provide the practical answers to the issues that you are facing. Call us to see how our experts can supplement your team and help you to solve the issues raised.

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Capital Markets Specialist
Jeremy Ford
JDF@riskrewardlimited.com