Treasury, Liquidity – Capital Risk Management (2024)

FAQs

What is the treasury liquidity risk? ›

Treasury Risk is the risk associated with the management of an enterprise's holdings – ranging from money market instruments through to equities trading. Liquidity and Capital Risk is generally defined as the risk associated with an enterprise's ability to convert an asset or security into cash to prevent a loss.

Treasury liquidity management is the process of managing a company's cash and short-term investments to ensure that it has sufficient liquidity to meet its financial obligations. The goal of treasury liquidity management is to optimize cash flow performance, enhance liquidity, and minimize financial risks.

Understanding Treasury Risk Management

Key components of this practice include cash flow forecasting, structured debt repayments, hedging, liquidity planning, and implementing new financial policies. Additionally, treasury audits are often conducted to ensure accurate financial reporting.

The three main types are central bank liquidity, market liquidity and funding liquidity.

Treasury Risk Management Summary

Risk and cost are related: buying comprehensive and robust risk-mitigating products, such as hedging products (also known as “derivatives”) and insurance, and investing in sound internal policies and operational controls will mitigate the company's risk.

The most effective way to manage investment risk is through regular risk assessment and diversification. Although diversification won't ensure gains or guarantee against losses, it does provide the potential to improve returns based on your goals and target level of risk.

Corporate Treasury manages the levels of cash in current accounts, arranges short-term funding with banks, and invests excess cash. To accomplish its goals, there are a variety of financial instruments available, and the treasurer's financial toolkit is still getting bigger. One such tool is known as “factoring”.

Finance teams use liquidity management to strategically move funds where they are needed. For example, a CFO may review the balance sheet and see that funds currently tied up in one area can be moved to a critical short-term need to maintain day-to-day operations.

There are five basic steps that are taken to manage risk; these steps are referred to as the risk management process. It begins with identifying risks, goes on to analyze risks, then the risk is prioritized, a solution is implemented, and finally, the risk is monitored.

What is liquidity risk management? ›

Liquidity risk management defined

Ensure a balance sheet earns a desired net interest margin without exposing the institution to undue risks from interest rate volatility, credit risk, prepayment dynamics and deposit run-off.

Management of liquidity risk is critical to ensure that cash needs are continuously met. For instance, maintaining a portfolio of high-quality liquid assets, employing rigorous cash flow forecasting, and ensuring diversified funding sources are common tactics employed to mitigate liquidity risk.

Liquidity management tools—such as pricing arrangements, notice periods and suspension of redemption rights—can help alleviate the liquidity risk generated by investment funds.