The Treasury team fulfils several fundamental services to the bank: we are the main conduit for funding all the Bank’s lending activities as well as managing the associated interest-rate, currency and liquidity risks. We also manage a substantial portfolio of assets in the form of bonds – which are held either on behalf of the bank or clients. And, importantly, we act as the counterparty for our clients in foreign exchange (FX) services.
In our experience, the impact on BACB has been less than initially feared. The crisis triggered an immediate reduction in market appetite and liquidity, which was more acute throughout March and into April but is now showing signs of easing. A contributing factor to this was no doubt the lockdown measures, which forced market practitioners to work remotely – crucially, away from the dealing room. As a result, individual dealers – either voluntarily or by instruction – have been pursuing smaller tickets in recent months, in addition to overall volumes falling.
It’s unsurprising that the market has experienced spells of volatility throughout the crisis. While volatility can be good for driving spreads and greater returns, the downside is it can increase complexities at the micro-level, given the slightest of delays between executing trades can have a material impact on the trader’s position. In this sense, the greatest mitigating factor at any treasury team’s disposal is experience – seasoned traders able to respond quickly and effectively to the market’s fluctuations are invaluable during times of volatility. For our part, I believe we’ve fared well through the crisis thanks to our specialist team.
Yes, while it will may take time before liquidity shortfalls in the market are fully normalised, we are past the nadir the market experienced back in March. Central banks responded proactively and promptly to cut rates, instigate Bond buying programmes and agree international swap lines to ensure that the markets remained liquid.
Importantly, less developed markets haven’t been an exception, with confidence slowly returning. For instance, the month of May saw Egypt raise US$5 billion in the international bond markets. It was reported that the issuance received bids of US$22 billion (more than four-times oversubscribed). What’s remarkable about the issuance, is how international appetite for a relatively esoteric risk had returned, even relatively early on during the recovery phase.
Treasury operates on screens and phones so as we were able to get the team working from home from day one, our function has broadly continued as it had done at the start of 2020, which means our customers should not have experienced any change to their service since the crisis began.
On an operational level, we remain supported by a stable funding base, which has meant there has been no need to sell treasury assets to repay liabilities – and so we haven’t needed to realise substantial losses on depreciating asset values during the downturn. Instead, we have gradually and selectively increased our treasury Bond positions over the past few months.
The priority has been on providing a consistent service to our customers by continuing to take their deposits and continuing to quote on FX at reasonable levels. On the lending side, our focus has not been on diversification for diversification’s sake, rather on building a reliable and carefully managed portfolio of highly liquid assets. For new bond purchases, we have kept to higher-rated bonds issued within countries with well-established capital markets as we trust that these have the highest chance of retaining inherent liquidity.
This has been a worthwhile adjustment: by buying during the depressed market of March and April, the risk-adjusted returns we have been able to secure have been attractive compared to other issuances further down the credit curve. However, it has only been made possible by having a proactive and dynamic approach to our bond portfolio – one where we are constantly evaluating our positions and remain cognizant of how the changing market can impact our risk exposures.
While we hope for the best, we are risk managers first and foremost, and my fear is that the dynamics of the global financial market could fundamentally alter in the longer term. For treasurers, chiefly concerned with minimising risks and ensuring that liquidity and activity remain stable, this presents a considerable challenge. But it remains one that, as a Bank, we are set up well to confront.
For any bank, successful treasury relies upon continuous and close dialogue with other parts of the business. Clients need reliable partners that understand the market’s risks from a holistic perspective. What’s different about BACB, in this regard, is the Treasury team’s proactive operations in highly-liquid markets such as FX and bonds. This means we can often identify shifts in market sentiment before they manifest in other parts of the business. Paired with our longstanding experience in specialist markets, my view is that we will remain well-equipped to support our clients through any possible turbulence ahead.
