Banks are highly sensitive to treasury risks. The conventional control and supervisory measures, mostly in the nature of preventive steps, can be divided into these three parts:
- Organisational Controls: This refers to the checks and balances within the system. Treasury is divided into three parts — the front, mid and back office. The front office generates deals and the back office settles trades only after verifying compliance with the internal controls. The mid-office is in charge of risk management.
- Exposure Limits: These caps are put in place to protect the bank from credit risk, which, in Treasury, may be of defaulters and counterparty.
- Internal Controls: The most important of the internal controls are open position and stop-loss limits.
Treasury faces many risks, the most important being:
- Market Risk: The risk of losses in an on-balance sheet and off-balance sheet positions arising from movements in market prices.
- Credit Risk: Borrower or counterparty failure, leading to a loss.
- Operational Risk: The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events