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Summary of Deloitte Report: Optimizing Global Treasury

Core Content

This Deloitte report examines the evolving challenges and opportunities for global banks in managing liquidity and funding risk in the context of increasing regulatory divergence. It highlights how the global regulatory landscape is shifting from a coordinated approach to more localized and fragmented regulations, which presents both challenges and opportunities for treasury functions. The report outlines a strategic journey for treasury optimization, emphasizing the need for integrated systems, streamlined processes, and enhanced data management.

Main Regulatory Developments and Their Impact on Treasury

• Net Stable Funding Rule (NSFR):
  Regulatory fragmentation is evident with the NSFR, as only 10 out of 27 BCBS members have implemented it by the 2018 deadline. The EU has introduced a more lenient approach with a four-year phase-in period, while Japan has postponed implementation. This divergence increases complexity for global treasury functions.

• Stress Testing:
  There is a growing trend to assess liquidity under sustained stress over longer periods (up to one year). The ECB has initiated 180-day liquidity stress tests. Firms are also enhancing liquidity models for resolution planning, aligning with FSB guidance. This reflects a broader regulatory divergence in stress testing approaches.

• Leverage Ratio:
  Despite the trend of divergence, there is some consistency in the leverage ratio requirement across jurisdictions, with most applying the BCBS 3% minimum. The EU has aligned with this, and the leverage-based G-SIB buffer is calibrated at 50% of the RWA-based surcharge.

• LIBOR Transition:
  Regulators are moving away from LIBOR toward alternative risk-free rates (RFRs). The UK FCA set a deadline for discontinuing LIBOR by year-end 2021. This transition has significant implications for unsecured funding, FTP frameworks, asset-liability profiles, and interest rate risk measures such as NII and MVoE.

• Fundamental Review of the Trading Book (FRTB):
  FRTB, proposed by BCBS in 2016, is expected to increase Tier 1 capital requirements for EU banks by 52%. Implementation is complex, with the EU planning a multi-step approach, likely delaying the binding capital requirement until CRR III. This will continue to rely on existing market risk rules.

• Ring-fencing:
  Regulatory divergence is also evident in ring-fencing rules. The US requires FBOs to establish IHCs, while the EU mandates IPUs for non-EU banks with €40 billion in assets. The UK applies a product-based approach, separating core retail banking from investment activities. This has a direct impact on funding sources for UK non-ring-fenced banks.

Challenges for Treasury

Operating Model and Governance

• Siloed reporting between regulatory, risk, and treasury teams.
• Lack of a unified operating model and governance structure.
• Fragmented collateral monitoring and management.
• Unclear roles and responsibilities across functions.

Processes and Controls

• Inconsistent processes for regulatory and MI reporting.
• Limited integration of internal liquidity stress testing with model validation.
• Disparate and reactive collateral management processes.
• Manual and poorly documented IRR activities.
• No integrated process for monitoring intraday liquidity risk across legal entities.

Data and Reporting

• Use of inconsistent data sources for regulatory and MI reporting.
• Augmentation of internal data with external feeds without clear approval.
• Manual and inefficient collateral data sourcing.
• Insufficient data granularity for behavioral assumptions.
• Need for both current and forecasted views of NII and EVE, with monitoring against risk tolerance and limits.

Systems Architecture

• Regulatory reports and MI reports are generated on separate platforms.
• Tactical solutions are used for key reporting, leading to inefficiencies.
• Collateral management is based on spreadsheets and manual inputs.
• NIM analysis is fragmented across functions, leading to inconsistent data and system requirements.

Key Recommendations for Treasury Optimization

1. Assess Treasury Maturity:
   Identify where the treasury function falls on the maturity curve—fragmented, controlled, or optimized.

2. Define Target State:
   Determine the desired target state and prioritize areas for optimization.

3. Develop a Strategic Plan:
   Create a roadmap to achieve the target state, including resource estimates and preferred technology enablers.

Areas for Optimization

• Funds Transfer Pricing (FTP):
  Banks should focus on steering business decisions and accurately pricing transactions.

• Limit Structure and Monitoring:
  Limit structures need continuous calibration and expansion to reflect changes in business models and asset-liability mixes.

• Stress Testing:
  Enhance reporting and analytics capabilities for both regulatory and internal stress testing, ensuring alignment across assumptions and business planning.

• Contingency Funding Plan (CFP) and Recovery and Resolution Planning (RRP):
  Align early warning indicators, triggers, action plans, and other components to improve preparedness.

• Liquidity Buffer:
  Monitor and maintain cost-optimal buffer sizes integrated with the capital framework.

• Trapped Liquidity and Capital:
  Release trapped liquidity and capital to achieve cost savings and operational efficiency.

• Collateral Management:
  Improve granular tracking of positions, considering encumbrance and valuation.

• Liquidity Data, Metrics, and Analytics:
  Move from tactical reporting to integrated, usable data for liquidity management and measurement. Focus on global vs. regional aggregated views where needed.

• Intraday Liquidity:
  Develop real-time monitoring and reporting capabilities, supported by robust governance and processes.

• Interest Rate Risk (IRR):
  Enhance modeling, automation, and analytics for IRR, especially with the changing interest rate environment.

• Funding and Asset Liability Management (ALM):
  Strengthen funding risk management through NSFR compliance, funding mix adjustments, and integration of ALM with business and treasury strategies.

• Other Key Areas:
  Monitor and manage models and model risk, cash flow forecasting, foreign exchange risk, and risk appetite setting. Establish systems like CLAR and ILAAP as part of standard processes.

Conclusion

The global regulatory landscape is becoming increasingly fragmented, requiring banks to adapt their treasury functions to local conditions. This shift presents both challenges and opportunities for optimization. Firms must adopt a holistic and technology-enabled approach to streamline operations, improve data management, and enhance risk oversight. By identifying their current maturity level and developing a strategic plan, treasury functions can progress toward an integrated and efficient operating model, ultimately supporting better liquidity and funding risk management.