Treasury
Services
& ALM
Bank treasury is the invisible engine of profitability — managing the structural interest rate risk embedded in the balance sheet, maintaining regulatory liquidity buffers, and optimising the investment portfolio to maximise risk-adjusted returns.
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Treasury Overview
Bank treasury is responsible for managing the structural financial risks inherent in banking — the mismatch between short-term liabilities (deposits) and long-term assets (loans) that is the fundamental business of banking.
Treasury's core responsibilities span asset/liability management (ALM), liquidity management, interest rate risk in the banking book (IRRBB), and the investment securities portfolio. Poor treasury management destroyed Silicon Valley Bank in 2023 — a $212B institution that failed in 48 hours due to IRRBB mismanagement.
Treasury also generates revenue — through the investment portfolio yield spread over funding costs, and through hedging services provided to commercial banking clients who need to manage their own interest rate and FX exposures.
SVB's collapse highlighted the existential danger of duration mismatch — holding long-duration securities funded by short-term deposits without adequate hedging. IRRBB is now the most closely scrutinised risk in bank treasury management.
ALM Framework
Asset/Liability Management balances the maturity, repricing, and cash flow profiles of assets and liabilities to manage NIM stability and interest rate risk.
Liquidity Management
Maintaining adequate liquidity buffers is both a regulatory requirement and an existential necessity — bank runs can materialise in hours in the digital age.
Basel III introduced two mandatory liquidity ratios: the Liquidity Coverage Ratio (LCR) — requiring banks to hold sufficient High Quality Liquid Assets (HQLA) to survive a 30-day stress scenario — and the Net Stable Funding Ratio (NSFR), measuring structural funding adequacy over a 1-year horizon.
The HQLA buffer is costly — holding cash and government bonds at low yields reduces NIM. Treasury's challenge is maintaining minimum regulatory compliance while minimising the carry cost of excess liquidity.
Liquidity Requirements
| Ratio | Minimum | US Major Bank Avg |
|---|---|---|
| LCR | 100% | 127% |
| NSFR | 100% | 118% |
| HQLA (% assets) | varies | 14–22% |
| Unencumbered Cash | varies | 8–15% |
Interest Rate Risk IRRBB
Managing the bank's sensitivity to interest rate movements is treasury's most consequential risk responsibility — and post-SVB, its most scrutinised.
Treasury Outlook 2026
Rate cuts create both opportunity and challenge for bank treasury — NIM compression requires active ALM repositioning.
- → Rate cut repositioning — Asset-sensitive banks repositioning to lock in fixed-rate assets before rates fall further — extending duration in the investment portfolio.
- → HQLA yield improvement — Rising government bond yields have improved the return on mandatory liquidity buffers — partially offsetting NIM compression.
- → Enhanced supervision — Post-SVB, regulators globally expanding IRRBB disclosure requirements and stress testing for mid-sized banks.
- → Hedge accounting — More banks using fair value hedge accounting to reduce NIM volatility from fixed-rate instruments — improving earnings predictability.
- → Digital liquidity — Real-time liquidity monitoring and AI-driven cash flow forecasting improving intraday liquidity efficiency.
Banks with liability-sensitive balance sheets (more floating-rate deposits than assets) will see NIM expand as rates fall — the reverse of the 2022–2024 dynamic. Identifying these banks is a key alpha source in bank equity analysis.