The role of Treasury in Portfolio Management – Part IV

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:

  1. A.      Business Decision Making Support
  2. B.      Liquidity & Funding Optimisation
  3. C.      Asset & Liability Management Optimisation
  4. D.      Capital Management Optimisation

This article will focus on pillar D – Capital Management Optimisation. As part of its core function, Treasury needs to contribute to identify the Capital optimal allocation, according to all risk types associated to the different Business Units and finally monitor the RWA / Capital data used to manage the Group and Solus capital requirements – making it more readily available, at the right level of granularity for both actual and forecast amounts.

In Financial Services it is crucial to identify the adequate level of capital to cover expected and unexpected losses. Treasury has a relevant role here, since executing the Bank strategy and translating the Risk Management framework into action. In the detail, in order to optimise capital management, the following golden rules should be followed:

  • Measure Capital prospectively and retrospectively
    • Conduct timely and granular measurement of regulatory and economic capital
    • Measure RWA at its lowest level of granularity and analyse Actual vs Forecast
  • Monitor Capital usage
    • Analyse risk adjusted return on capital, breaking the performance down into business unit, asset type and risk class
    • Monitor real time capital limit usage
  • Control Capital Allocation
    • Control capital limits allocation and analyse limits impact on capital optimisation
    • Identify capital/liquidity correlation by business unit and asset type


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