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Treasury Management in Banking
June 2024 Examination
1. In March 2022, major Central Banks worldwide started increasing interest rates
resulting in higher Treasury Bill yields and failure of few banks in US (due to selling of
Assets to meet liquidity). Explain the role Treasury Policies & ALCO for liquidity
management? (10 Marks)
Ans 1.
Introduction:
The dynamics of central bank policies, particularly regarding interest rates, have significant
ramifications for financial institutions, especially banks. The period starting from March 2022
witnessed a pivotal shift as major central banks globally commenced a cycle of interest rate
hikes. This led to an upward surge in Treasury Bill yields, impacting various sectors of the
economy, particularly the banking sector. Concurrently, the repercussions of these actions
included the failure of several banks in the United States, attributed partly to liquidity
constraints exacerbated by the necessity to sell off assets. In this context, the role of Treasury
Policies and Asset Liability Management Committee (ALCO) becomes paramount. Treasury
Policies guide a bank’s approach to managing its liquidity, while ALCO serves as a strategic
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2. A British MNC in India want to move their Corporate Treasury to Head Office in
London for better liquidity management. Explain what are the considerations when
choosing the location to setup a Corporate Treasury office? (10 Marks)
Ans 2.
Introduction:
The decision to relocate a Corporate Treasury office involves a multitude of considerations,
ranging from regulatory environment and market access to operational efficiency and strategic
objectives. In the case of a British Multinational Corporation (MNC) contemplating the transfer
of its Treasury function from India to its Head Office in London, various factors come into
play. London, as a global financial hub, offers numerous advantages in terms of liquidity
management and access to financial markets. However, the decision must be weighed against
several considerations to ensure optimal outcomes for the MNC. This essay will delve into the
3. In view of settlement risk and increasing interest rates, explain the following:
a. What is Herstatt risk? (5 Marks)
Ans 3a.
Introduction:
Settlement risk poses a significant challenge to financial institutions, particularly in
environments characterized by increasing interest rates. Among the various forms of settlement
risk, Herstatt risk stands out as a notable concern. This essay aims to elucidate the concept of
Herstatt risk in the context of settlement risk and the implications of rising interest rates on its
b. How Assets and Liabilities are considered Rate Sensitive? (5 Marks)
Ans 3b.
Introduction:
Understanding the rate sensitivity of assets and liabilities is crucial for effective asset-liability
management (ALM) in financial institutions. Rate sensitivity refers to the degree to which the
value or cash flows of assets and liabilities change in response to fluctuations in interest rates.
This answer aims to elucidate how assets and liabilities are considered rate-sensitive and the