Dublin Business School Treasury Risk Management Report - B9AF005

This report provides a comprehensive overview of treasury risk management within the European banking sector. It begins with an introduction to the sector's current health and its ability to adapt to the digital future, analyzing the key challenges banks face, particularly those related to low interest rates and their impact on profitability. The report also explores opportunities for the Euro banking sector, including strategies to address challenges and leverage strengths in the financial market. It examines the implications of the ECB's Asset Purchase Programme (APP) and the effects of Brexit on the financial sector. Furthermore, the report delves into the implementations of Basel III and CRD IV, the continuous performance of Shadow Banking, and the scope and significance of Fintech. Finally, it evaluates the overall performance of the European Banking Sector and concludes with key findings and references.

Running head: TREASURY RISK MANAGEMENT
Treasury risk management
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Table of Contents
Introduction......................................................................................................................................2
Key challenge facing by bank..........................................................................................................3
Constrain to the bank profitability...................................................................................................3
Opportunities to the Euro banking sector........................................................................................4
Implication of the renewal of the ECB’s Asset Purchase programme............................................5
The implementation of the Basel III................................................................................................8
Implementations of the CRD IV......................................................................................................9
Continuous performance of the Shadow Banking.........................................................................10
Scope and Significance of “Fintech”.............................................................................................10
Evaluation of the European Banking Sector..................................................................................11
Conclusion.....................................................................................................................................11
Reference.......................................................................................................................................13

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Introduction
An in-depth overview by the statistical dossier reflects the current health of the European
banking sector as well as its wellness to meet the demands of the digital future. This report will
give attention on the condition of the European banking sector and its impacts on the various
factors. Starting with a brief mark on the European banking sector, it is going to reconcile the
liability lines that seemed at the eruption of the financial crisis globally. At the beginning of the
crisis the monetary condition of the Euro area banks has enhanced decidedly. It has been
recommended that aggregate core capital ratio of euro banks reflects at around 14 percent at the
end of the second quarter of 2018. There are at constant levels of regulatory liquidity ratios with
a collective liquidity coverage ratio 141 percent. Satisfying the minimum supplies for own funds
and eligible obligations European banks are also making development. The main indicator is that
the issuing of tire one and tire two bonds instruments by the “Euro area banks” and detained by
the depositors in the euro area. That is also increased by two-thirds between 2013 and 2017. In
repairing their balance sheet, finally banks are making progress. The aggregate non-performing
loan ratio is shared at around 8% to its current level of 4.4%. The recent result shows that after
stress, the Euro area banks’ core capital is at 9.9%, increased from 8.8% in the same
implementation two years before. Capital buffers is the resulting factor of the strong build-up of
the underlying assets in current years.
Considering the impacting factor that is hitting to the traditional banking business models
are addressed as follows:

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Key challenge facing by bank
One of the essential key issue faced by the global interest rate changes being framed by
this research.
Constrain to the bank profitability
Low interest rate in environment created by the central banks around the world is to
kindle the progress during the financial crisis (Vazquez and Federico 2015). It will have a great
negative impact on the business of bank. “Low interest rates” will create coerce the net interest
margin of the banks and lowest line effectiveness for some while to come.
Closely the net interest margin, in most of the corner tapering significantly, over the last
few years. Low credit demand and high leverage is creating pressure the pre-provision of the
banks’ revenue stages. As in the “German Banking” market, “German Banks” earn their cost of
capital only 6% due to such business model which is interest dependent. Bundesbank and the
“German Federal Financial Supervisory Authority” (BaFin) (Drescher et al 2016) making a
recent survey on the profitability and pliability of German credit organizations, which refers that
the profit will likely to reduction significantly if the low interest rate setting perseveres. This is
largely because of constricting margins in borrowing and the deposit business for example in the
area of transferable deposit and savings.
Euro area banking sector, (Covi, Gorpe and Kok 2019) specifically in weak profitability
bank are continuously suffering due to anaemic loan request, low interest rate and high cost.
Below mentioned figures relates the asset biased net income of banks. Which is rated by
“Moody’s Investors Service” form dissimilar regions with euro area banks at lowest of the list
(Altavilla, Boucinha and Peydró 2018).

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EU Banks’ Profitability remains persistently low compared to global peers.
Opportunities to the Euro banking sector
Despite of having low interest rate challenges in the banking sector, there are some
opportunities to address these challenges. On the positive note, the bank will need to develop
strategies. Regulation in tighter form in the banking industry and the lower interest rate referred
by the global trend are the external factors, which the banking organization cannot effect. To
report the issues, bank will have to regulate their business wherever it is conceivable for
example, they could ask for certain types of business to avoid monitoring capital charges or
adjust their asset distributions to make further yield. About the client’s changing demands and
behaviour, the banks can leverage their strengths. Advantages in a competitive manner that
should not be avoided. This changing demands and behaviour can meet with the bank’s
proficiency in the financial market and the information and management of the inherit risks
(Menicucci and Paolucci 2016).

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On the contrary, the paper also studied about the rising of the global interest rate. In the
recent picture, the Federal Reserve raised interest rate (Martin 2019) for just the second time for
the last seven years. When the Federal changes the interest, rates are subject to the speculation to
the various economists. One thing is certain that a rising interest rates has a definite effects on
the consumers. Consumer should consider the potential impact that a rising interest rate can have
on their wallets.
Rising rates can derive a big picture. When the banks makes loan and offer interest on the
deposits in the savings, they evaluate the interest rate using the Federal Reserve rate as a base.
Thus, the Federal rates will go up the associated banks interest rates also can go up and down as
well. When the interest rate was zero for the several years, those people who were looking to
save money they have received vary little interest for their savings. Meanwhile, those who have
lent money they got benefit. Rising rate will make money on the savings. It attracts the
consumers to make deposit (D'arista 2016).
Implication of the renewal of the ECB’s Asset Purchase programme
The ECB has joined to several other central banks on 22 January 2015, in implementing
“quantitative easing” or QE (Claeys, Leandro and Mandra 2015) by an “Asset Purchase
Programme” in order to report the risks of a long period of low rise. The ECB’s existing
programme has expanded by the APP in order to purchase the private sector assets. This paper
studies the implications of the APP on the yields and on the macro economy and provides some
lights on its transmission (Falagiarda and Reitz 2015).

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The imprint of the ECB’s asset purchase programme as follows:
The analysis proposes that the non-banking financial institutions (NBFIs) which is positioned outside in
the euro zone to dispose the large volumes of euro area government bonds and hold a considerable
fraction of the earnings as euro dominated payments, Since the Euro modalities did not allow the NBFIs
to engage directly with the Euro system. Their payments left an international path of the euro-
denominated claims. As a gateway of the United Kingdom, findings are main role to the Euro Area
financial system for investor outside the Euro area.
Since it was established over 20 years ago, in the segment of international financial
system the euro has combined its role as a major currency followed by the US dollar. The ECB
will have a consequence over the immediate boarders of its currency area that undertakes the
monetary policy actions.
A specific characteristics of the ECB’s APP (Gambetti and Musso 2017) was that the
stockholders resides outside the Euro area were very vigorous retailers of the Euro area
government bonds to the ECB. They have documented for coarsely 50% of all APP bond sales.
The other major central banks conducted the asset purchase programmes, elicited much less
involvement on the part of non-resident depositors. In shortly the implications described as
follows:
 The Euro area were active by the Non-banking financial institutions (NBFIs) as if the
seller of euro area bonds during the ECB’s expanded asset purchase programme
(ecb.europa 2020).

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 Analysis also replicates a holding of a substantial fraction of their bond sale proceeds by
the non-euro area of NBFIs dominated deposits in the banks outside the euro area
(ecb.europa 2020).
 Banks of the United Kingdom and their euro area associates were the primary facilitators
of the APP bond sales by the non-euro area investors (ecb.europa 2020).
The financial service sector based on UK has developed a symbiotic and consistent
ecosystem over the many years. The ecosystem encompasses a large diversity of financial and
finance related specialized services firms working together. This system has allowed the UK to
build an environment favourable for innovation and growth. It provides a platform by which it
maximise the possible growth and opportunities that could arise from the UK’s exit from the EU.
The biggest issue that BREXIT without a no exit deal creates a sudden loss for financial
services. The EU pass porting system for banks and financial services corporations that enables
authorised firms in EU or EEA state to trade freely with any other additional authorisation
(Kierzenkowski 2016).
There are three main options related to Brexit and banks:
 Negotiating a new equivalence regime
 Current passporting arrangements continuation.
Moving forward from the EU with no deal and afterward arranging equivalence
agreements.
In the current years, banks are watching a set of regulations and mechanical change that
had major insinuations for many areas of their processes. No deal of Brexit has a wider range of

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impacts. Banks will need to implement a justified change within the overall the business and
supporting functions under a hard Brexit scenario (Ramiah, Pham and Moosa 2017).
The implementation of the Basel III
BASEL III is a complete set of improvement (Rubio and Carrasco-Gallego 2016), which
helps to measure in the banking prudential regulations, which refers a banking management of
Basel group for supporting the protocols, regulations and the risk management of banking sector,
the aim of these measure as follows:
 Banking sector’s development capability to engross shocks that is arising from financial
and economic pressure. The source can be anything.
 Improvement in management of risk and the governance
 To strengthen the banks potentiality and disclosures.
In the year 2013, the European Union acquired a regulative compendium to boost up the
regulations of the finance segment and to contrivance the Basel III agreement in the EU legal
framework. The new principals replaces the Current Capital Requirements Directives with a
directive and regulations. It would be the major steps to create the financial system safer and
stable.
The detailed potential supplies for credit organizations and asset firms, which consider
the regulations, follow a new instruction covers area of the current capital requirements directive
where EU provisions need to be rearranged by the member states in such a way that suit to their
individual situation (Sbarcea 2015).

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Implementations of the CRD IV
According to the requirement of Basel III the banks have been public for the capital
increases. To integrate a minimum leverage ratio of 3% of the total managed assets Euro bank
acts as verbal system. At the same time the bank has also concerned that, the implication of CRD
IV dilutes the capital and liquidity reforms, decision taken by the G20’s seminar. In addition to
the implementation of the complex legislations the flexibility of the capital requirements are
required to apply. Management should consider the addition capital buffering and the timing of
implementations (Ojo 2015).
In the context of implementing both the capital requirements directive (CRD) IV (Ojo
2015), that establishes the capital requirement regulations as well as the capital requirement
directive. The object was to implement the Basel III in the European Union. As a result, this
replace the commands with a regulation and a directive. The implication of such a change does
not only mean the consciousness of the position of ensuring the Basel principles and regulations
which is more binding and enforceable, it impacts an era where the it is more important to use an
implementation and managerial tools such as binding technical standards and being introduced
and generated by the European Banking Authority (Gordon and Ringe 2015). It refers a crucial
role in the implementation of Basel III in the European Union. Another significance of such
move towards the Basel rules and regulations more enforceable, which lies the facilitation of the
larger constituency, compliance and convergence. Therefore, the EU banks zone has been
emphasized by the increased relevance of the Basel III rules.

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Continuous performance of the Shadow Banking
Considering the continuity of the so-called “shadow banking” (Adrian and Ashcraft
2016), the financial instruments’ growth make this sector boom in a global platform.
This is considered as a watchdog that coordinates the financial regulations for the G20
large economics (Xiao 2015). The board of finance highlighted that it is a narrow measurement
of activities in shadow banking that could stance a risk to solidity. It has arose 7.6 percent to
$45.2 trillion.
This so-called “Shadow Banking” sector also build businesses other than series that
provides financial services, has been considered with doubt by the some regulators due to the
year ago financial disaster (Lysandrou and Nesvetailova 2015).
A marginal measure imposed all the financial firms that are non-central banks, banks,
pension funds, insurance companies and all other financial professionals rose 8% to $99 trillion.
It represents 30 percent of the global economical assets.
Scope and Significance of “Fintech”
Fintech is the sum of financial and technology that helps the limited rigor and the
financial practices which is completely dependent on the technology. The scope of Fintech
(Buchak et al 2018) is growing with the basic functionalities of online banking and expanding
with the related financial services. The degree of continuous innovations pushing the market
forward, in the case of demanding authoritarian in the competitive sector in order to satisfy the
consumers. An effective strategy that can help the banks and the financial institutions to adopt
the technology in their banking or financial process, which would provide such outcomes as, cost
effectiveness and customer satisfaction (minutehack.com 2020).

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Following are the six most essential fintech trends that can help the banking sector to stand
within the competitive edge.
 Customer service by live chat
 AI and virtual assistance
 Correlation of sales and support
 Automation based on context
 Technology of voice
 Self-banking service
Evaluation of the European Banking Sector
As the valuation suggests that for the European banking sector, in the Euro Stoxx bank
index, the calculation result shows a negative figure as -55.185 and the last price of the index is
48.40, therefore, current the position is highly underweight. It is recommend to avoid such fund.
Conclusion
The above analysis on the European Union Banking Sector shall conclude a constant
performance in the global index, despite of having several challenges that usually arise by the
global interest rate change. Study also evaluate the scope of the banking sector and provides a
best framework that address the issues. Through this analysis, it has seen that the paper designed
a systematic discussion relating to the performing of the banking sector. The need of the
implication of the ECB’s asset purchase programme is very essential to give leverage the
industry. Finally, the current situation of the low growth and the low interest rates are already