FIS Blog

Technology plays key role as banks reshape treasury functions

David Renz | Wednesday, March 30, 2016

Leading banks face a simple reality in the years ahead – the need to rethink their treasury function as it plays an increasing role in driving growth. They must not only carefully consider the effects of interest rate risk and regulation on treasury, but also adapt to compete effectively – and act swiftly in order to implement new ideas, broaden their product offerings, and confront the challenges that lie ahead.

We surveyed more than 100 management executives with direct responsibility for treasury functions, providing insight into their key challenges and opportunities, as well as the infrastructure and technology needed to support their shifting treasury strategies over the next two years.

Redefining the treasury function
Banks continue to face a volatile business landscape that’s being radically reshaped by looming changes in interest rates and a seemingly endless wave of regulation. This is putting pressure on all aspects of the bank’s operations but especially the treasury, forcing banks to rethink how they define this critical function.

Although rising interest rates provide opportunities for banks to increase profitability, they pose new challenges for treasurers. Banks must carefully consider the effect of interest rate risk and regulation on their treasury function. And with regulators pushing banks to hold significantly more capital in reserves, treasurers must ensure that the bank adheres to these guidelines while avoiding losses on LCR-eligible, high-quality liquid assets.

Expanded responsibility drives new opportunity
While rising interest rates present a challenge for banks seeking to borrow at low short-term interest rates and to lend at higher long-term rates, other banks expect interest rate increases to be a major driver of revenue and profitability. In addition to the scope for margin improvements, these banks see interest rate trading as likely to be one of their most profitable activities over the next two years, second only to exchange rate trading.

In our survey, 88 percent of respondents say their banks’ treasury functions have P&L responsibilities, and nearly three-quarters of those banks have some kind of growth target attached to this. In response, treasury departments are prioritizing revenue diversification and are more likely to turn to trading under current macro-economic conditions, with structured derivatives and revised balance sheet management seen as key strategies for revenue diversification over the next two years.

Broadly speaking, they intend to shift their approach from offering standardized products to more complex, exotic and/or client-configurable products. With these increased demands on the treasury business, many banks are also revising their overall organizational strategies by looking after their own FX positions and the FX positions of their clients, for example, while seeking to provide the most cost-effective funding strategy.

Supporting shifting strategies
Implementing the right technology is becoming a top priority for treasurers to support changing product, pricing and funding strategies while providing balance sheet analysis and meeting regulatory mandates. However, the introduction of new treasury strategies will not always be simple. More than 40 percent of banks have difficulty achieving an integrated view of the treasury and overall balance sheet management. Income volatility related to rising interest rates, fragmented IT processes and a rapidly changing regulatory landscape are also key concerns.

Banks must ensure they have a robust funds transfer pricing (FTP) framework in place in order to provide full insight into the effects of the bank’s pricing strategy on its deposit funding blocks as well as enable the bank to create some price tension. And by offering other products, treasurers can give savers, companies and wealthy individuals a compelling reason to invest their money with the bank while retaining a funding effect. This will require technology capable of supporting a wider range of asset classes.

Banks also now recognize the need to consolidate all their treasury activities within a single P&L account in order to identify strategic opportunities and assess the risk and reward of everything they do. In our survey, banks were unanimous in the view that combining an analytical view of the balance sheet (such as asset liability and liquidity risk management) with a flexible transactional treasury platform will help them deliver a stronger business in the future.

Technology holds the key as treasurers seek to modernize and comply with the regulatory imperative. Fast and efficient transaction processing tools will no longer, in themselves, be sufficient. In the near future, banks will require greater risk and analytical capabilities, broader asset class coverage and new product structuring capacity. By working with their technology providers to achieve their objectives, the future for bank treasury is a bright one.


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