Capital Market and Treasury

Running head: CAPITAL MARKET AND TREASURY
Capital market and treasury
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1CAPITAL MARKET AND TREASURY
Executive summary:
The current paper focuses on the analysis of the capital and treasury market that considers
different aspect which include treasury department of banks, credit rating agencies, money
and foreign exchange market and risks management failure in banks. All the discussions have
been supported from the insights that have been gained from practitioner and academic
research. For the purpose of analysis, several papers have been refereed that provided
relevant information on the concerned topic. There are total four topics that have been
addressed individually in the present report.

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Table of Contents
Introduction:...............................................................................................................................4
Evaluation of treasury department of banks by analysing the example of failed banks:...........4
Evaluating the aims of regulatory reforms of credit rating agencies in Europe and USA:........6
Evaluating the conditions of money market and global foreign exchange during 2014-2019
and comparing the situation with that in 2009-2013:...............................................................10
Identification of tools by treasury management of banks to mitigate foreign exchange risk:. 15
Discussing the failures of risk management technique in banks in the financial contexts such
as use of VaR and derivatives:.................................................................................................17
Conclusion:..............................................................................................................................20
Reference list:...........................................................................................................................22

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Introduction:
The report is prepared for analysing the capital and treasury market by deriving the
insights from academic and practitioner research. Such report has been prepared by covering
the topics as mentioned in the mandatory section and additional two topics are chosen from
the additional section. The first section comprise of two topics that is treasury department of
banks and credit rating agencies. The analysis of treasury department of bank is done in terms
of the activities performed by the front, middle and back office and whether the introduction
of an integrated unit would be efficient. Treasury department of banks form an important part
as it deals with management and balancing of daily flow of cash along with other activities
such as investment of banks in foreign exchange, securities, cash and liability management
instruments (Labidi et al. 2018). In light of the reforms for monitoring credit rating agencies,
the aims of such reforms in USA and Europe have been analysed. All such analysis and the
findings from the research conducted are supported by the insights gained from practitioner
and academic research. The later part of report demonstrates the analysis of condition of
global money and foreign exchange market from the time period 2009 to 2018. In addition to
this, report also outlines the different tools employed by treasury management of bank for
managing credit risk and mitigating foreign exchange risk. Furthermore, the report focuses on
the risk management failure in banking and financial institutions due to the failure on part of
risk metrics to assess the risks.
Evaluation of treasury department of banks by analysing the example of failed banks:
The treasury department of a bank is a part of investment banking business which has
the responsibility of managing and balancing the liquidity of funds and daily flow of cash
within the banks. The primary objective of such department within the bank is to forecast the
amount of net interest income by preparing several financial models. The treasury department

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has multiple units having front, middle and back office as it is entrusted to perform all such
functions. The treasury department perform the role of front office as it assist banks in
generating revenue and profits and the key players lining up in such role include asset
managers, brokers, structuring professionals and brokers (Bashir 2016). The middle office of
treasury banks performs the role of mitigation of investment risk as much as possible and it
consists of research, risk management and compliance departments. In addition to this, there
are various normal back office activities which the treasury department of bank has to
perform. The total amount of loan that can be extended and the extent of deposits taken by
the bank are supposed to be enquired by the treasury department by regularly communicating
with the bank. In addition to this, the amount of risk that can be taken by the banks at certain
point of time is also monitored by the bank by liaising with the proprietary and Forex
department. In addition to this, they are to ensure that bank is not running out of cash and
adequate amount of cash is available in the banks (Kidwell et al. 2016). Therefore, there are
different roles that are required to be performed by treasury department which results in unit
having different offices.
The failure of banks to efficiently manage its treasury department would lead to
failure of banks because of deterioration associated with the liquidity position. The Latvian
bank was one the largest lender which failed because of deterioration in its liquidity position
as there were not sufficient funds to meet the stressed outflow. The bank experienced a bank
run that resulted in draining out of money by bank. The US treasury further triggered bank
run and they were promptly denied the funding from US treasury. All the payments out of
the bank were frozen by the banks for preventing the collapse. The business practice of bank
was to bank high shell companies in the absence of appropriate policies and procedures of
risk mitigation that facilitating transactions for the parties concerned (Berndsen et al. 2018).
Such failure of bank causing deterioration of its liquidity position is due to its failure of

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treasury department to properly manage its liquid funds. It can be inferred from the failure of
such banks that the treasury department of such banks is exposed to particular risks
concerning its operations and being susceptible because of involvement of large amount of
money implying potential complexities surrounding the activities. There is differences in
individual treasurers in terms of its scope, make up and allocation when considering
operational requirements (Isa 2016).
An integrated trading unit conducting trading, analysis, confirming, treasury and other
accounting activities can provide several advantages as the centralized treasury department
would have clear picture of long term liquidity position of bank. Such integrated unit would
be able to deploy the funds and take control and decision to then banks best advantage. It is
considered prudent to have integrated treasury unit because as it helps in closely monitoring
the activities from time to time that would help in minimizing the probability of making
default (Yeoh 2018). The unnecessary movement of funds around different centres would be
prevented due to centralized system. Furthermore, there would be a better managerial and
risk control along with the responsibility as a result of centralized treasury. Decentralisation
of treasury unit such as back office unit, middle and front office would not be necessarily
acquainted with the exposure taken by other units. It might be required by treasury to change
its position if the market is highly volatile and it is possible only if the treasury department in
well integrated (Georgiadis and Mehl 2016). Moreover, the decision of the management can
be promptly implemented in the light of centralized treasury unit. Therefore, the efficiency of
functions of bank can be improved with the help of integrated treasury department.
Evaluating the aims of regulatory reforms of credit rating agencies in Europe and USA:
For the current financial crisis, credit rating agencies (CRA) bears considerable
responsibility as they serve as the gatekeepers to the global credit market and consequently