exam elaborations ban2602 banking introduction to treasury management
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University of South Africa (Unisa)
BAN2602 - Banking : Introduction To Treasury Management
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Knowledge Tutorial (Source)
0780728739
BAN 2602
OCT/NOV 2016
Section A
1. A bank’s treasury department consists of a front office, middle office and back office
i. Front office responsibilities include with transactions in the domestic and
overseas markets are concluded by the bank’s dealers for individual and
business customers or for proprietary purposes (the bank’s own account).
ii. The middle office is responsible for ensuring that transactions are concluded in
strict accordance with the bank’s risk management policy and in compliance
with approved policies, procedures and legal requirements. The responsibility
for risk management, and the many aspects and activities related to it, lies with
the middle office.
iii. The back office is primarily involved in administration matters, which include
deal processing, confirmations, settlement exposure, position monitoring,
accounting.
2. The rationale for having government set capital standards for banks is based on the
following underlying assumption is that the private marketplace does not correctly price
the impact of system failures. Thus, the purpose of capital regulations is to limit the
risk of failures, to preserve public confidence and to limit losses to the federal
government arising from deposit insurance claims.
3. In South Africa, treasury Bills (TBs) are regarded since they serve the purpose of to
fund part of the government budget deficit and for monetary policy purposes (in that
they are the main instrument used by the banks to acquire accommodation from the
Reserve Bank).
Advantages of treasury bills
It is considered to have little or practically no risk attached. All things being
equal, you will definitely get your money back with the promised interest.
They are very liquid (i.e. you can easily convert them to cash).
No transaction cost is charged. Unlike other forms of investment where you are
charged a fee by the broker who purchases them for you, brokers do not charge you
for purchasing TBs for you.
Disadvantage of treasury bills
The interest rates which are paid on TBs are almost always lower than the other
investment options on the market. This however makes sense because one of the key
principles of investment is “the higher the risk, the higher the expected return”.
Given their safety, T-bills offer relatively low yields.
You constantly have to turn them over into new investments since they mature
so quickly. This means that if you have a T-Bill paying a good rate of interest and rates
drop, you'll end up reinvesting and making less money.
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