The role of Treasury in Portfolio Management – Part III

by Leonardo Orlando

Last time we explained how Treasury role can become crucial in the portfolio management, highlighting the four main pillars where it can provide its value:

A. Business Decision Making Support

B. Liquidity & Funding Optimisation

C. Asset & Liability Management Optimisation

D. Capital Management Optimisation

This article will focus on pillar C – Asset & Liability Management Optimisation. As part of its core function, Treasury needs to optimise the Banking book, minimising the market risk impact on it.

In previous article we defined as main targets the consolidation of the interest rate risk management across ALM & Execution (Treasury FO), which I will deep dive into.

Consolidation of the interest rate risk management across ALM & Execution (Treasury FO): in Financial Services it is crucial to minimise the risk that market interest rate fluctuation would impact on the Asset & Liability position of the Bank. So the following golden rules need to be followed:

• Ensure an effective balance–sheet management

o Define a balance sheet strategy, which meets treasury strategy and risk appetite

o Implement a fully integrated Balance Sheet forecasting process

o Analyse A& L composition, verifying it is constantly aligned to the balance sheet forecast

• Minimise Banking Book Market Risk

o Implement a key performance monitoring framework aligned with Risk management

o Identify, measure and constantly report interest rate and fx risk, based on the predefined KPIs

• Recommend the appropriate mix between equity and debt

o Implement a benchmark framework to measure Bank’s leverage vs Competitors

o Implement the rating strategy into a consistent monitor and control framework

o Implement a structured analytics framework to monitor and control equity/debt mix

• Determine the liquidity risk appetite

o Quantify the liquidity buffer €driven by the Balance Sheet strategy

o Analyse the regulatory liquidity requirements

o Determine a liquidity risk appetite consistent with the Balance Sheet strategy and the regulatory requirements


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