Treasury management is the process of managing an organization’s financial resources in order to optimize cash flow, minimize financial risk and maximize investment returns. In the case of banks, treasury management involves managing their cash and liquidity position to ensure that it has sufficient funds to meet its financial obligations, such as paying depositors and making loans while also making a profit. 

Why is Treasury Management Important for Banks? 

There are several reasons banks need a solid treasury management approach…

• Managing liquidity: Banks must have sufficient funds available to meet the demands of their customers, such as withdrawals, deposits and loan requests. Effective treasury management helps banks maintain the correct level of liquidity to meet these demands, while also being mindful of the increased cost of holding excess cash. 
• Managing risk: Banks face a variety of financial risks, including interest rate risk, credit risk and liquidity risk. Treasury management helps banks identify, measure and manage these risks to mitigate impact on their financial performance.
• Maximizing profitability: Effective treasury management can help banks increase profitability by achieving optimal cash flow, reducing borrowing costs and generating investment returns. 
• Meeting regulatory requirements: Banks are subject to a variety of regulatory requirements related to their financial stability and risk management. Effective treasury management helps banks to meet these requirements and demonstrate their financial strength to regulators and stakeholders. 
• Enhancing customer service: Treasury management plays a critical role in ensuring that banks can provide high-quality customer service by managing their own cash flow and liquidity effectively; after all, how can they help businesses to do this if they don’t have the capabilities?  Effective treasury management helps banks to build long-lasting relationships with their clients. 

Effective treasury management is an essential function for banks and ultimately determines its long-term financial stability. 

Impact of Interest Rate Policy on Treasury Management

Interest rates play a significant role in treasury management as they impact a company’s cost of borrowing and the returns earned on its investments and this works in the same way for banks. As interest rates rise, financial institutions and indeed any business with debt finance are affected by higher borrowing costs. The main implications are;

• Cost of borrowing: A key component of treasury management, as interest rates rise, so does the cost of borrowing. When interest rates are low, it’s cheaper for a company to borrow funds. As we know interest rates have been on the rise for some time, another 25bps just announced by the Federal Reserve today and over the past year 5% has been added to the federal funds base rate (the rate at which depository institutions charge each other for overnight loans).  
• Investment returns: Interest rates also impact the returns earned on a company’s investments. When interest rates are high, companies may be able to earn higher returns on investment, but when they are low, the returns can be lower. This can impact a company’s investment decisions and its ability to generate income from its excess cash. In a bank’s case, less cash due to higher interest rates, means there is less money for them to lend for business loans and other services

Treasury management means managing interest rate risk closely to determine how movements may negatively impact a business’ or banks’ financial position. In a changing interest rate environment and with other economic instability, banks may have struggled just as other businesses have to manage their liquidity effectively and meet customer demand; this is evidenced by the recent collapse of Silicon Valley Bank (SVB) and Signature Bank in the U.S. and the subsequent failure of First Republic Bank on May 1st. 

A Treasury Management Partnership for Today

In the current climate, with many businesses struggling to repay their loans amidst rising costs and a sales downturn, banks may be tightening their requirements for borrowers as they attempt to minimize their risk. A big factor for banks is the creditworthiness of the business itself. A business’ credit rating may drop during tough times and one that was a good candidate for further lending may become unappealing to traditional banks. Working alongside a factor on higher risk clients could prevent losing their business completely due to more stringent borrowing requirements. Furthermore, businesses have an increasingly complex set of needs currently and banks don’t always have the full range of financial solutions to offer them. 

Working in partnership with Invoice factoring companies, banks can improve their treasury management while retaining a relationship and continuing to fund their clients. A factoring company can provide a new source of funding for the bank by purchasing accounts receivable (AR) from the bank’s customers. This can help the bank balance cash flow and liquidity by providing them with immediate cash for the AR they sell to the factoring company. The bank may then use the cash to fund operations or invest in other assets, while the factoring company generally takes on the risk of collecting the accounts receivable. 

Alternative finance companies often offer other services such as working capital loans, supply chain finance and asset based lending which can be a good way for banks to get access to new revenue streams by offering their clients a comprehensive and integrated working capital solution. 

A factor can also help banks to mitigate credit risk by providing credit analysis and monitoring services for their joint clients. Factoring companies often have lots of expertise in assessing the creditworthiness of a company’s customers and can help in evaluating the risk associated with lending to those customers. This can help banks make more informed decisions and reduce credit risk. 

Overall, by partnering with a factoring company, banks can enhance their financial services offering, reduce their risk exposure and improve the bottom line.

Partnering with Sallyport to Better Serve Clients

If you’d like more information on how we work with our business banking partners to provide customized cash flow solutions and support them in conserving treasury management, reach out to our team today.