Bank treasury management evolution: From ALM challenges to Smart Treasury

In 2022, many central banks shifted from their ultra-low-interest rate environment to a restrictive one, and several giant banking names were caught without proper risk management in place. 

Following the bank failures of Silicon Valley Bank, First Republic, Signature, and to a lesser extent Credit Suisse in 2023, there is increased focus on liquidity risk management. Given that, how should institutions rethink their structures to ensure their sustainability in the changing rate environment? 

ALM challenges and the role of funding structures

The 2023 banking crisis highlighted a core issue – traditional asset-liability management (ALM) challenges. “The bank failures… reflected traditional ALM risks and mismanagement, particularly excessive funding concentration,” says Moorad Choudhry, Author of “The Principles of Banking.” 

According to Choudhry, the failed banks were overly dependent on a limited range of funding sources, leaving them particularly vulnerable to a funding outflow when the bonds they held significantly depreciated, resulting in a loss of confidence.  

This over-reliance increased their susceptibility to liquidity shocks, especially as the Federal Reserve raised interest rates. The situation was further exacerbated by deteriorating balance sheets, prompting non-diversified depositors to withdraw significant amounts of funds. With the rapid pace of modern financial transactions, these factors converged to create a severe liquidity crisis that the banks could not withstand. 

Choudhry notes that UK regulations like the Pillar Two liquidity standards aim to address this. Pillar One outlines the general Basel requirements for liquidity risk under the Liquid Coverage Ratio (LCR), but Pillar Two zeroes in on concentration risk, so banks are encouraged to diversify their funding sources. Given the 2023 banking crisis, it is imperative to reassess the funding structures of all major financial institutions. 

The rise of Smart Treasury 

Technology and advancing tools have reduced the risk of banking crisis resulting from treasury mismanagement and have led to a new concept called “Smart Treasury.” Smart Treasury emphasizes the importance of real-time data and advanced technology for Treasurers, aiding them to properly maintain a bank’s balance sheet and ensure it remains strong and sustainable in the face of many challenges.  

“I define it as a treasury function that has all the data it needs, both real-time and forward-looking, to enable it to make decisions such that the balance sheet structure is always robust,” says Choudhry. 

Smart Treasury enables treasurers to quickly assess the financial health of their balance sheets and make more informed decisions, whether managing funding, liquidity, or mitigating market risk. But what makes it “smart”? Advanced technologies, particularly artificial intelligence (AI) and real-time data analytics are key drivers of this transformation. These tools offer predictive modeling capabilities, providing insights to help anticipate future challenges and optimize balance sheet structures based on various scenarios. 

Dolores Tesha, Bank Treasury Product Manager at Bloomberg explains, “Having good tools, including systems, can go a long way in reducing the probability of bad outcomes.” By integrating these technologies, treasury departments can respond more effectively to emerging risks, addressing them before they escalate into crises. 

Establishing Smart Treasury practices  

Integrating smart treasury practices can be effectively achieved through Bloomberg’s Trade Order Management Solutions (TOMS) and Multi-Asset Risk Systems (MARS). These advanced tools equip treasurers with real-time data and analytics, enhancing risk management processes and facilitating efficient liquidity, funding, and market risk management. By providing a comprehensive view of market conditions, TOMS and MARS enable the development of treasury management systems that can adapt to evolving circumstances and proactively identify potential risks. 

 “Tools that provide timely information and integrate data from both internal systems and external environments empower treasurers to make well-informed decisions,” says Tesha. 

Given constant market volatility and rapid technological change, it is important to leverage these sophisticated tools more and more. Banking institutions will need to navigate increasing challenges but can do so with greater agility than ever before.  

Quotes in this article are based on the “Smart Treasury: Exploring Trends & Challenges in the Evolving Market” webinar moderated by Joseph Streeter, Head of Bank Treasury and Money Market Products at Bloomberg. See the full version of the webinar here.