The Certificate of Bank Treasury Risk Management is a six-month, part-time professional qualification designed to empower individuals working in, or intending to work in, every aspect of bank balance sheet management and asset-liability management (ALM). Austin Clark spoke to Professor Moorad Choudhry, BTRM Designer and Founder about the Certificate and the challenges it helps students deal with.
What do you see as the main challenges facing bank treasurers at the moment?
I think there are three challenges for banks generally, which become the challenge for bank treasurers because they’re closely connected with managing the balance sheet. So the challenge for banks is a challenge for them.
The first one is, of course, regulation. It’s onerous. One has to demonstrate compliance with it at all times. To take the UK jurisdiction, it’s not just the PRA and the FCA, not to mention Basel. There’s also the utterances from the EBA. I don’t think Brexit will change this. Fast-forward to 2025 and I can well imagine that the PRA would want to make sure that it was very closely aligned with what the European regulators were doing. If the EBA issued some final guideline on some issue, I can’t imagine the PRA not having something that was at least as equivalent as that.
The challenge is keeping up-to-date with what happens in regulation, and then seeing what the impact of that is on the bank. In other words, making sure you are compliant, making sure you understand what that means for you as a bank and as a treasury function and then implementing it. You have to devote resources, time, money, human resources and systems resources to maintaining compliance.
The second challenge is, of course, competition. At the end of the day, banking is quite a commoditised product. All the banks offer more or less the same products to more or less all the same customers. Competition means you have to manage the balance sheet as efficiently as possible. Capital and liquidity are constraints on the balance sheet and they’re expensive. Maintaining capital liquidity, which is required by regulation, means that you have a constraint on the balance sheet, the expense of maintaining that.
Because of competition, you can’t afford to have a balance sheet that isn’t optimised. You need to have capital to satisfy the needs of the regulator and the board’s risk appetite, but not any more than that, because then that deoptimises the balance sheet. It’s a balancing act.
If I was the only bank in town, I would be less concerned about balance sheet optimisation, but because all banks are competing for the same space, I need to make sure I’m as efficient as possible from a balance sheet perspective. Of course, as a banker I’m concerned with customer service and reputation, but as the treasurer, I’m more concerned with balance sheet optimisation because competition dictates that I have to be.
The third challenge is, of course, technology and digital transformation. If the treasurer wants to manage the balance sheet as efficiently as possible and do all the stuff the regulator requires, including stress testing and all that, how can I use technology and digitization to make that process more efficient? That’s a challenge and an opportunity. I’m a big fan for instance, of banks adopting machine learning systems to help make the treasury function more efficient.
I don’t think this is just the preserve of the large banks. I know they’re using machine learning to help them with their credit risk, for example. It can predict obligor default better than existing models. I think the treasurer can use those sorts of artificial tools and techniques – tools in their ALM space, asset-liability management.
How does the Certificate of Bank Treasury Risk Management (BTRM) help bank treasurers address these challenges?
One of the key tenets of the BTRM qualification is the focus on what I call strategic ALM, a proactive treasury function. Treasury as a discipline has all traditionally been reactive. They call it asset-liability management, but the balance sheet comes about because of customer business.
Before you do any customer business you’ve got your firm capital and that’s it. Once you start doing customer business, once you start lending money and taking deposits, that creates your balance sheet and that creates your risk exposure. That creates the credit and the liquidity risk and interest rate risk, and if applicable the FX risk on your balance sheet. Traditionally, in the ALM function, the treasurer would then go “manage” that for risk. That’s fine, there’s nothing wrong with that and banks have been doing it for 500 years now.
However, given the challenges mentioned above, it’s difficult to optimise the balance sheet unless you employ proactive, strategic ALM. The treasurer has got to be involved in the strategy-setting side, working very closely, side by side almost, with the head of lending and the head of deposits, and, as part of ALCO, influence their strategy setting and product origination. Proactive treasury is the only way to optimise the balance sheet.
Treasury faces a three-dimensional optimisation problem involving three stakeholders. You’ve got the shareholder, the customer, and the regulator. All three of them want the balance sheet to do certain things in a certain way. The customer wants good products and that impacts the balance sheet as well. They want good rates, that impacts the balance sheet. The shareholder wants good rates too, but in the opposite direction to what the customer wants! And of course the regulator requires minimum amounts of capital and liquidity and also makes certain products, due to the rules, very expensive to offer. This creates the 3-D optimization challenge. The treasurer should be involved in the three-dimensional optimisation solution. This is another objective that BTRM assists with – this qualification is not just traditional treasury management, it’s more strategic and proactive treasury. And of course, it’s a practitioner course. It is designed for practitioners by practitioners. It is not an academic qualification.
Does that mean that we need mindset shift within bank treasury?
It might not require a full paradigm shift, but certainly the culture needs to evolve. Banks have been managing their balance sheet for assets and liability risk for 500 years, but it was only in the late ‘60s that the ALCO committee became a thing. But the role of ALCO has traditionally been looking after liquidity and interest rate risk. It didn’t really have an eye on capital and credit. It was part of this reactive function, chaired usually by the CEO or the CFO, or maybe someone in treasury.
Today, I think banks need to start thinking about the ALCO being the pre-eminent risk management committee for the bank, and in charge of every aspect of balance sheet risk. We need to have a more integrated balance sheet origination and strategy-setting process.
Pre-crash, pre-2008, capital and liquidity were not constrained items on the balance sheet. Liquidity was freely available and cheap. Because of the way capital was calculated for large banks, benefitting from their internal models, they had much thinner capital buffers. Now, we need, due to regulation, much more.
When I first started talking about this back in 2006-2007, before the crash, no one was really interested. Now, it’s obviously something that’s important. The crash has made capital and liquidity more expensive, more constrained, and so recognising the need to optimize balance sheets is more universal.
The good news is that I see more and more banks giving ALCO the authority to report directly to the board, as I think there are more and more banks realising that balance sheet management is more important than it might have been in days gone by.
Please tell us more about the Certificate
It’s a six-month part-time course. Those based in London can attend the lectures physically at our lecture suite in Canary Wharf every Wednesday evening. The lecture is live-streamed around the world and can be viewed live but, of course, our student base is global, so the lecture recordings can be viewed at any time. We have students in the North American time zone and the Southeast Asian time zone. Although once I’d spotted two Indian students who were watching the lecture live and I was thinking, “Hold on a minute, isn’t it 2am over there?!”
The Certificate is an international one – banking business models are different. Some of them are very large, some of them are very small, some of them have simple products, some have complex products. Balance sheets are different, but the main challenges are the same across the globe, whatever the business model.
There are 23 lectures over five modules, covering all the aspects of treasury risk management and balance sheet risk management (for more details visit the BTRM website). Following the final lecture there’s a four-week gap, followed by the written examination, sat locally.
The exam is a traditional sight unseen, written paper, three-hour examination, sat in an exam hall. We’re very keen on that. It’s what in the UK is termed a “Level 7” graduate qualification in terms of its learning and its engagement and the time spent on it. It’s a complete module for a master’s, MSc, program, a 30 credit, one term, one semester module. The pass mark is deliberately set at 60% and not 50%. We want to raise the bar a bit and the pass with distinction level is set at 80%. We also have The Wiley Prize, sponsored by the publisher John Wiley and Sons, which is awarded to the student with the highest mark in that cohort.
In addition to the lectures we also have our student forum. Students can ask questions live during the lecture, or post them on the student forum. We always guarantee a reply to students within 24 hours of posting. We always encourage the forum to be used not just for questions or queries, but to raise debate and discussion too.
This proactive approach ties in with our belief that treasury needs to be proactive, as discussed above, so it makes a lot of sense.
The next Certificate gets under way on Wednesday 17th April 2019. For more information and to sign up visit www.btrm.org