Bank Treasury SurveySeeing through the settling dust

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The recent financial markets turmoil and new regulatory guidance have increased the demands on the role of treasury and are changing how they interact and align with risk management, finance, IT, senior management, and the board. It is within this context that we present this white paper, which highlights some key findings and perspectives, based on results from a bank treasury survey we conducted recently, on how treasury organizations are reacting and responding to the new regulatory requirements and market dynamics that are raising the profile of treasury and the liquidity risk management practices employed across financial institutions.

While different financial organizations will likely be affected by the new regulatory requirements in different ways, one thing is clear: these proposed rules mark a new era in financial regulation. Many of these requirements will likely become law soon, which is making it an imperative for financial institutions to assess how their current organization is primed to meet these new changes.

Foreword

We hope that the findings and analysis presented in this white paper provide helpful insights that you can take back to your treasury organization and reflect on how your organization is responding to the new regulatory changes and market dynamics. We encourage you to share this white paper with colleagues – executives, board members, and key managers at your financial institution. We believe the issues outlined herein should serve as a starting point for the crucial dialogue on raising your company’s treasury profile and on investing for what’s to come in the near future.

If you have further questions or would like more information about the Treasury Survey, please contact us.

Thank you,

Robert MaxantPartnerFinancial Services Industry Treasury LeadDeloitte & Touche LLP

As used in this document, “Deloitte” means Deloitte & Touche LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Bank Treasury Survey Seeing through the settling dust 2

In an effort to improve liquidity and liquidity risk management capabilities at financial institutions, regulatory bodies have proposed requirements for greater liquidity, as well as standards to improve how liquidity risk is managed and monitored. Some key concerns they aim to address: insufficient holdings of liquid assets, funding risky or illiquid asset portfolios with short-term liabilities, lack of monitoring and forecasting, and a lack of robust contingency funding plans that are not appropriately linked to stress test results.

It is, therefore, incumbent upon treasury functions to consider and prepare for these and other potential regulatory challenges.

Key drivers of regulatory change• To help promote basic principles of liquidity risk

management and to standardize practices around the globe, the Basel Committee published in 2008 Principles for Sound Liquidity Risk Management and Supervision (“Sound Principles”), which provide detailed guidance on the risk management and supervision of funding liquidity risk that should help promote better risk management in this critical area. In the U.S., various regulators jointly issued similar guidance in June 2009 that harmonizes the U.S. guidance with the international standards outlined in Sound Principles.

• Basel III guidelines introduced two regulatory standards for liquidity risk that aim to promote short-term resiliency of institutions by requiring sufficient high-quality liquid resources to help survive stress scenarios (liquidity coverage ratio) and a medium-term measure to encourage more stable sources of funding on a structural basis (net stable funding ratio).

Background

• Global regulators have stepped up their demands for a more consistent, aggressive, and more comprehensive approach to stress testing as part of the revised internal capital adequacy assessment process (ICAAP) stipulated by Basel II. Stress testing will be required not just at the enterprise-wide level but also across each legal entity and line of business and should factor in liquidity risk-specific scenarios as a routine part of stress testing.

• On October 11, 2011, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) released proposed regulations implementing the Volcker Rule. As part of the release, a narrow exception for trading by banks made for the purposes of liquidity management for the bank is permitted; however, restrictions are defined on what counts as liquidity trading in order to distinguish it from proprietary trading and that trading be “limited to an amount consistent with a banking entity’s near-term funding need.”

• On December 20, 2011, the Federal Reserve issued new enhanced prudential standards that have raised the profile of liquidity risk management and emphasize the importance of board engagement in liquidity risk management and oversight. The proposed standards would apply to all financial institutions designated as systemically important financial institutions ('SIFI'). The standards build on the core provisions of previously issued guidance, Supervision and Regulation letter 10-6; Interagency Policy Statement on Funding & Liquidity Risk Management, issued March 2010. However, the proposed standards are broader, deeper, and more prescriptive.

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The objective of this treasury survey was to provide insights into the demands and changes treasury organizations are facing throughout the banking industry amidst the new regulatory landscape and new market dynamics. The survey also sought to understand how treasury organizations are responding to these challenges from an operational and technology perspective.

This survey report aims to provide a global industry perspective on the following topics: • Role of treasury at a bank and its functional composition

• Business practices employed around capital management, asset liability management (ALM), funds transfer pricing, liquidity, and risk management

• Current areas of strategic focus and investment

• Treasury systems and technology infrastructure landscape and potential needs

Twenty-four financial institutions of varying asset and revenue size, market offerings, and geographical locations participated in this survey. Each participant was interviewed and/or surveyed on the following topics:• Treasury roles and responsibilities

• Funding management

• Funds transfer pricing

• ALM

• Treasury revenue recognition

• Capital management

• Information systems

• Liquidity risk

• Risk management

This survey was administered online as well as in interviews with treasurers and managing directors of the treasury function within the financial services industry.

Survey responses across all participants were aggregated for analysis. Survey participants were also categorized into three groups for further analysis against their peers: 1) Tier 1 global financial institutions; 2) Tier 2 and 3 super-regional and regional institutions; 3) other financial institutions.

This white paper provides key insights gleaned from the survey responses and provides analysis within the context of the current market and regulatory environment and does not contain the full set of survey responses. Participants of this survey received the full results of the survey.

Attribution of any particular comments or responses in the survey results or in this white paper has not been made to specific organizations.

Survey objective and approach

Bank Treasury Survey Seeing through the settling dust 4

Survey results indicate that treasury departments are indeed highly concerned with regulatory preparedness and their liquidity management, technology, and reporting capabilities. Given the current market dynamics and the recent regulatory requirements, some key questions that may be immediately top of mind to treasurers include:• How will pending and proposed regulation change my

treasury group responsibilities?

• Will the data that supports my liquidity, funding, and cash management be sufficiently robust, timely, and accurate?

• Will my treasury IT infrastructure be able to support the new regulatory monitoring, forecasting, and reporting requirements?

The combination of the treasury survey results and changes in the marketplace highlight some key themes that are closely intertwined with topical themes and issues that the industry is currently addressing:• Evolving role of the treasury function and its governance

and oversight responsibilities

• Liquidity risk management

• ALM

• Collateral management

• Stress testing

• Data and business information

• Treasury technology

Governance and oversightThe recent enhanced prudential standards issued by the Federal Reserve have raised the profile of liquidity risk and emphasize the central importance of the board being more engaged in liquidity risk management and oversight.

One of the key requirements of the proposed prudential standards is that the board will be called on to review and approve contingency funding plans and the bank’s liquidity risk tolerance at least annually. It is, therefore, encouraging that the survey results indicate that currently 82% of respondents have their board or committee of the board approve their contingency funding plans.

An additional requirement of the proposed enhanced prudential standards is that the board of directors (or the risk committee) must oversee the company’s liquidity risk management processes, which would include: review of the bank’s liquidity risk profile, review and approval of the liquidity stress testing methodology and results, and review and approval of liquidity buffers.

Key findings and observations

Figure1: Which are direct responsibilities of the treasury department?

0% 20% 40% 60% 80% 100%

Securitization of the firm-owned assets

Support of P&L and risk models vetting

External rating annual presentation

Counterparty risk management

Fund transfer pricing management

Collateral management

Foreign exchange risk management

Asset and liability management

Capital allocation

Capital management

Long-term funding management

Liquidity and cash management

Yes No

4%

26%

61%

13%

30%

43%

30%

83%

35%

70%

35%

100%

96%

74%

39%

87%

70%

70%

17%

65%

65%

30%

57%

5

The impact of this requirement likely will be significant, particularly for banks designated as SIFIs and those publicly traded banks with assets totaling more than $10 billion. Given monitoring requirements that the risk committee (or designated subcommittee) will now have to conduct, it is anticipated that the risk management role of treasury will need to increase significantly. Currently, only 13% of survey respondents consider risk management as part of the role of the treasury function.

Roles and responsibilitiesSurvey respondents reported differences in the objective(s) their treasury department served. 25% of respondents reported that treasury was considered a cost center, while 20% reported that treasury was considered a profit center, and 55% reported that treasury was considered both a cost and profit center. Similarly, respondents reported a variety of different attributes upon which the performance of the treasury department was measured.

Survey respondents also reported a diversity of practice regarding the roles and responsibilities of their treasury department, as well as their department's headcount staffing and relationship to other functions.

Liquidity risk managementActive intraday liquidity management with visibility to a bank’s aggregate liquidity position across legal entities and business lines is an important component of sound risk management practices for institutions, as described in Sound Principles, and a prescribed requirement of the proposed enhanced prudential standards. However, survey responses indicate that there may be challenges in fully supporting these practices.

Half of survey respondents report that they manage 90-100% of their institutions’ liquidity on a daily basis, while 27% manage only 50-75% of their institutions’ liquidity daily. Looking at only Tier 1 global banks responses provides some surprising insight: 33% manage 90-100% of their institutions’ liquidity on a daily basis and another 33% manage less than 50%. Furthermore, 67% of these Tier 1 banks indicated that they have 90-100% visibility to their institutions’ liquidity positions on a daily basis, 33% say they have between 75% to 90% visibility. Among large, complex organizations, the interdependencies that exist among payment systems and the inability to meet certain

Figure 2: Which percentage of the liquidity positions across the institution are managed on a daily basis by the treasury function?

Figure 3: Which percentage of the liquidity positions across the institution are visible daily to the treasury function?

Less than 50% Between 50% and 75% Between 75% and 90% Between 90% and 100%

Less than 50% Between 50% and 75% Between 75% and 90% Between 90% and 100%

13%

33%53%

27%

18%

9%14%

50% 73%

5%

Bank Treasury Survey Seeing through the settling dust 6

critical payments has the potential to lead to systemic disruptions that may prevent the smooth functioning of all payment systems and money markets.

In light of the new liquidity requirements stemming from Basel III, survey respondents indicate that the biggest issue facing their organization in preparing to meet the new requirements is lack of available data required (40%) followed by technology and infrastructure readiness (25%).

This response indicates a strong need for treasury technology and data investments in the near term, particularly for the large global banks that will face a higher burden under the new regulatory requirements.

Asset liability managementALM involves the active and effective management of interest rate risk exposures. ALM has traditionally been a core part of treasury banking activities. With the increasing use of complex financial instruments and funding techniques, it has become increasingly important for banks to consider employing a rigorous and holistic approach to

Daily Weekly Monthly

Next year (1) Next three years Next five years Weekly Monthly Quarterly Semi-annually Annually

33%

53%

73%

36%

14%

50%

29%

52%

9%

10%

41%

36%

23%

Daily Weekly Monthly

Next year (1) Next three years Next five years Weekly Monthly Quarterly Semi-annually Annually

33%

53%

73%

36%

14%

50%

29%

52%

9%

10%

41%

36%

23%

Daily Weekly Monthly

Next year (1) Next three years Next five years Weekly Monthly Quarterly Semi-annually Annually

33%

53%

73%

36%

14%

50%

29%

52%

9%

10%

41%

36%

23%

Figure 4: How frequently is the ALM process performed?

Figure 5: How frequently are the forecasting model assumptions updated?

Figure 6: Balance sheet forecasting is performed for the following period

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managing interest rate risk exposures and have appropriate tools in place to regularly report and monitor these exposures in order to effect appropriate action.

It is a positive trend to report that all survey respondents perform ALM processes on at least a monthly basis: 36% do so daily, 14% perform it weekly, and the remaining 50% do so monthly. Related to this, the majority 52% of respondents update their forecasting model assumptions on a quarterly basis whereas 29% make updates on a monthly basis. Additionally, 70% perform stress testing as part of their ALM process.

However, given the analytical and data-intensive activities involved with ALM, it is interesting to note that 48% of respondents perform modeling and stress testing related

to ALM manually. Additionally, only 35% of respondents indicate that their current ALM process supports customized reporting and common accessibility to data.

Survey results also disclose that only 43% of respondents employ a stochastic approach to modeling that takes into account any unpredictable variable changes to assets and liabilities that could lead to sudden liquidity demands. The majority (78%) employ the common deterministic approach to modeling.

Given the regulatory focus in this area, it can be anticipated that more rigor in the approach and the tools used to support ALM should be considered both to respond to regulatory requirements and to provide more analytical rigor to address new market dynamics.

Figure 7: Identify which of the following your ALM model supports.

0% 20% 40% 60% 80% 100%

Customized reporting and common accessibility

Modeling and stress testing processes are manual

Modeling and stress testing processes are automated

Specific models

Stress testing

Static analysis: stochastic approach2

Static analysis: deterministic approach1

Yes Not by treasury

Reference :

1 Static analysis | deterministic approach: It is the simplest way of doing an analysis by taking the most likelihood estimates.

2 Static analysis | stochastic approach: It is being or having a random variable for estimating the probability distributions of potential outcomes.

22%

57%

30%

30%

52%

52%

65%

78%

43%

70%

70%

48%

48%

35%

Bank Treasury Survey Seeing through the settling dust 8

Collateral managementFluctuations in margining requirements from lenders and trading counterparties can lead to costly and sudden liquidations and/or exacerbate liquidity risk, which require vigilance and close monitoring of counterparty exposures and margin requirements. Similarly, collateral calls on over-the-counter (OTC) derivative positions, discretionary interest rates, and other material adverse changes, such as a downgrade in counterparty ratings, may have immediate liquidity impacts.

It is, therefore, interesting to note that 57% of survey respondents have direct responsibility within their treasury function over collateral management.

Treasury functions do not have to have direct responsibility and oversight for managing these exposures and risks; however, they may have to be closely aligned to the groups that have direct responsibility so that information can be shared in real time for appropriate monitoring, reporting, and actions.

This may be particularly important for banks that spread their positions across several counterparties and aggregate their views of exposures across all counterparties to effectively monitor and react to any sudden or simultaneous collateral or margin demands from counterparties.

Stress testingAnother requirement of the proposed enhanced prudential standards is that banks would have to regularly stress test cash flow projections by identifying liquidity stress scenarios and assessing the effects on the covered company’s cash flow and liquidity. Stress testing would cover exposures, activities, and risks both on and off the balance sheet.

It is, therefore, notable that 81% of survey respondents actively participate in an enterprise-wide stress testing program, although 14% indicate they only participate in stress testing sporadically or when requested, and the remaining 5% do not participate in an enterprise-wide stress testing program at all.

Participates in all scheduled and ad hoc stress testing

Participates in stress testing sporadically or only when requested

Does not participates in the enterprise stress testing program

33%53%

81%

14%

5%

Figure 8: How involved is your treasury organization currently in an enterprise-wide stress testing program?

Data and business informationLiquidity risk management calls for a disciplined approach to data management. Given the dynamic nature of liquidity, managing these exposures is particularly dependent on the timely collection of consistent, quality, and granular data across business lines, products, legal entities, and functions. Granularity of data will be a challenge for many banks in meeting the enhanced reporting and monitoring requirements of the proposed enhanced prudential standards rules. This is especially true as treasury is required to produce more frequent and detailed reports and data to the board and senior management.

Improved data management capabilities and data accessibility can be enabled with an enterprise-wide data governance model that can complement enhanced software and technology applications that provide robust functionality and are integrated across the organization.

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The survey results indicate that there is room for improvement in these areas: 68% of all respondents are somewhat satisfied with the quality of data available to treasury. Furthermore, 18% are dissatisfied with the quality of the data upon which treasury bases its liquidity and cash management decisions. Of note is that less than a third of all respondents stated that common data sources and applications were employed in the resources on which treasury bases its daily functions.

In addition to managing the quality of data sources, it will likely become critical to effectively manage static reference data required by treasury, such as product reference data type. The survey results indicate that 43% of survey respondents are highly satisfied with the current product reference structure supporting the reporting needs of treasury. However, 43% are only somewhat satisfied, while the remaining 14% are not satisfied.

Very satisfied Somewhat satisfied Dissatisfied

33%53%

14%

68%

18%

Figure 9: How satisfied are you with the quality of data currently available to the treasury organization?

Figure 10: How well does the current product type reference structure support the reporting needs of treasury?

High Medium Low

33%53%

43%

43%

14%

Treasury technologyThe IT implications of the various proposed regulatory changes will likely be significant and broad ranging for treasury. Technology demands may include lower process latency, more-granular data management, more robust and extended quantitative analytics capabilities, and flexibility and scale to integrate with other applications used across the bank that share information needs with treasury, such as market and credit risk systems and trading and collateral management systems across business lines.

The survey results indicate that many treasury organizations have traditionally relied on in-house solutions to support various treasury needs: 59% of respondents use in-house solutions to support liquidity and cash management, 33% of respondents use in-house solutions for ALM, 39% use in-house solutions for foreign-exchange (FX) risk management, 54% use in-house solutions for both long-term funding management and capital management.

Bank Treasury Survey Seeing through the settling dust 10

High Medium Low

33%53%

43%

43%

14%

Figure 11: Data available to your treasury organization currently is reconciled to your statutory financial data.

Generally speaking, the preference has been towards relying on in-house solutions to meet unique and specific business requirements. However, given the depth of regulatory requirements, demanding a swing towards the use of specialist vendor solutions may occur considering the potential scale and flexibility that may be necessary to support future needs.

Regulators, most notably the Senior Supervisors Group in its October 2009 report, have cited the complexity of the industry’s technological infrastructure as a key hindrance in identifying and measuring risk within the system, making this area a likely candidate for further focus in the future.

Technology vendors have made major changes to functional coverage, scalability, and performance in an effort to address recent regulatory mandates across the globe as well as customer demand for improved integration among finance, treasury, and risk platforms. As a result, the functional breadth that many vendors offer has increased and can be leveraged to support many of treasury’s needs.

0% 20% 40% 60% 80% 100%

Securitization of the firm-owned assets

Support of P&L and risk models vetting

External rating annual presentation

Counterparty risk management

Fund transfer pricing management

Collateral management

Foreign exchange risk management

Asset and liability management

Capital allocation

Capital management

Long-term funding management

Liquidity and cash management

In-house solution Specialist vendor solutions best-of-breed Not very influential Manual

59%

54%

11%

11%

4% 17%

6%

6%

33%

22%

22%

13%

13%

13%

7%

7%

7%

7%7%

17%

24%

6%

15% 15%

25%

27%61%

56%

56%

50%

29%

13%

33% 10%

22%

24%

64%

74%

33%

33%

11%

53%

53%

39%

38%

ConclusionWhile banks of all sizes and types are in various stages of preparing for and adapting to the new regulatory requirements and market dynamics, it is likely that the potential impact to treasury organizations will be profound and transformative. The proposed regulatory stipulations and our survey results indicate that governance, data management and business information, and technology infrastructure will be key areas of focus for treasury organizations in the immediate years to come. The operational scope of daily duties and responsibilities likely will be redefined for most treasury organizations.

Much change will have to be effected in a short period of time, but some might say it is long overdue. The coming change presents an opportunity for banks to rethink how their treasury function operates and resolve potential deficiencies to produce a more agile ability to respond to adverse market environments.

This document contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this document, rendering business, financial, investment, or other professional advice or services. This document is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this presentation.

Copyright © 2012 Deloitte Development LLC. All rights reserved.Member of Deloitte Touche Tohmatsu Limited

ContactsRobert MaxantPartnerDeloitte & Touche LLP+1 212 436 7046rmaxant@deloitte.com

Betty HwangSenior ManagerDeloitte & Touche LLP+1 212 436 4645behwang@deloitte.com

Matthew DunnSenior ManagerDeloitte & Touche LLP+1 908 963 6815matdunn@deloitte.com

Michael Ostrander Jr.ManagerDeloitte & Touche LLP+1 646 385 6240 mostrander@deloitte.com

C. Adam BrennamanSenior ConsultantDeloitte & Touche LLP+1 212 436 5864 cbrennaman@deloitte.com

Kyle R. CoffeySenior ConsultantDeloitte & Touche LLP+1 212 436 7902kcoffey@deloitte.com