Investment Banking Treasury
Head of FX Europe at BBVA
A bank’s markets division, also known as its Treasury, is part of its wholesale banking business. It is a highly specialized area that seeks to meet institutional and corporate customers’ investment and risk coverage needs. The retail banking area serves individual customers and also receives support from the markets area to design and manage products and manage the associated risks.
A bank’s Treasury is part of its investment banking business (also known as wholesale or corporate banking) and other business areas like mergers and acquisitions, project finance, syndicated loans and global transactional banking. But without a doubt, the Treasury – or the markets area – is a fundamental part of a bank’s investment banking structure.
This business is based on four fundamental pillars:
- Technology: Technology is essential to access real-time information on financial markets. It also crucial to develop systems that make it possible to calculate the price of the different products for sale and the associated risks. Technology also enables the proper confirmation and liquidation of operations. And it is key to comply with current and future regulatory requirements.
- Products: The Treasury offers customers risk coverage and investment solutions for the most simple to the most complex products (structured products) and for all kinds of financial assets – generally fixed income, interest rates, equities and exchange rates, and in some financial institutions, also commodities.
- Distribution channels: The capacity to provide the product to customers at a competitive price, when and where they need it.
- Capability to manage and hedge the risks associated with the products being sold: Once the institution’s creditworthiness has been determined with each of its customers, these risks are then assessed and managed. Technology, knowledge and experience play a key role in this aspect.
Panoramic view of the Treasury room of Ciudad BBVA in Madrid.Carlos Benítez-Donoso
How Treasury areas have evolved over time
Treasury areas have changed considerably since the start of the financial crisis in 2007. Regulation has been crucial to changing the banking business in general, and in markets in particular. Regulations were established that discourage banks from taking on their own risks (proprietary trading). They also require greater control, management and monitoring of the risks derived from operations with customers, all while optimizing capital consumption. Greater transparency and customer and shareholder protection are also fundamental goals, and banks are intended to have not just an economic, but a social component as well.
Greater transparency and customer and shareholder protection are also fundamental goals
One of the most relevant modifications was the change in business model – from a model based on assuming and managing proprietary risks to one based on customers and their needs, where electronic and digital channels and customer experience are fundamental.
Today, technology is more relevant than ever, and not only in the different stages of the purchasing process. The development of electronic platforms to purchase financial products represents one of the most significant changes. The sector has evolved from traditional in-person systems to these electronic platforms (e-commerce), boosting operation processing capacities exponentially.
The remuneration system has also changed. Variable remunerations have gone from being focused on certain quantitative aspects related to generating profit to being tied to numerous qualitative elements like the institution’s performance as a whole.
The future of Treasury areas
It is extremely hard to imagine that investment banking will disappear, as some have already predicted. It is only logical to think that the role of the markets division will continue being highly relevant in the future, as the specialization this area possesses is necessary and essential to meet customers’ needs – increasingly international and complex.
With this in mind, there are four factors that will be key in the evolution and development of Treasury departments. The first is deregulation. If the U.S. were to revise its regulations, it remains to be seen what would happen in Europe and how this would affect financial institutions’ capacity to assume risk. Second, a departure from “zero” interest rates, which would revitalize certain businesses, would also entail more demands on treasury departments for risk management. Third, fintech firms will play a decisive role in the future and it remains to be seen if they will replace treasury departments by offering similar services, or if they become technology suppliers, leading to closer collaboration with banks. And finally, the development of electronic markets, and their influence, will also affect businesses’ human structures and support them.
Treasuries are needed to optimize business management and offer appropriate customer service for financial markets
In any event, Treasury departments will not lose their fundamental role in banks’ value chain. They are needed to optimize business management and offer appropriate customer service for financial markets. If this takes place through thorough risk measurement and management, banks will be “safer” than they were before.