The hidden champion: What role does ALM and treasury play in building business resilience?

What's keeping ALM and treasury people awake at night? In this Q&A with Monika Bączyńska, Director, Head of Financial Resources Management, mBank, we discuss current challenges for ALM and treasury people, the growing visibility of ALM and how it can support the growing awareness of ESG and climate risk.

Could you say a few words about what ALM and treasury is?

The typical function of ALM (asset liability management) and treasury is managing the risk resulting from assets and liabilities mismatch. This includes liquidity and funding management as well as IRRBB. Depending on the structure, in some banks, the function may also include investment strategies, FTP policy, balance sheet optimisation, modelling and might be extended by capital management. They are the 1st LoD.

As Head of ALM, what has been keeping you awake at night during this past year?

Currently I’m in charge of FIRM (Financial Resources Management), which includes ALM from funding and IRRBB perspective, as well as capital management. Past years, for me and my team, has meant constant crisis management, in all three areas.

In recent months, the interest rate in Poland increased from 0.1% to 6.75%. This has huge impact on IRRBB management including changes to models as well as significant impact on capital position (drops in fixed rate assets valuation) and liquidity situation.

I have to sleep well at night and stay calm to be able to manage the challenges we are facing every day.

ALM treasury has been called a hidden champion by some: What role do ALM and treasury people have to play in optimising business resilience and managing risks – and why should banks prioritise it?

The role of ALM is changing over years, from 'just closing the position' activities, into very active balance sheet management. The goal is not only to stay within regulatory and internal limits, but to make the most from the available financial resources.

This also includes understanding differences between economic view and IFRS view of the banks’ financial results and taking the appropriate action being fully aware of the consequences.

The next point is understanding client’s behaviour and models, which are behind risk assessment and how the changes in macro environment will impact the position. It’s less about historical analysis, but more about understanding the models’ risk and weaknesses and anticipating the direction of changes, to be able to manage the risk in advance.

Realising all the interconnections and being able to act quickly is a key factor for business resilience. ALM people are in the middle of all this.

How has the past couple of years of market volatility affected (and potentially changed) ALM and treasury and their roles within financial institutions?

I would say, the role of ALM and Treasury do not change in times of market volatility – we are constantly focusing on manging the risks and resources in optimised way.

What has significantly changed, is the visibility within the bank. In the calm times, when everything is going smooth, ALM is usually a hidden unit, managing the risks and adding value to bank’s P&L, and relatively little attention is paid to this area.

In turbulent times, when everything around us is changing rapidly, this area plays significant role in managing the changes in risk positions and capital and become one of the important focus areas of the top management.

In recent times the regulatory landscape has developed rapidly, ESG is becoming more present and the regulatory frameworks growing stronger, and we seem to be staring into a future that’s only growing more uncertain. What does this mean for ALM/ treasury and what are the challenges ahead?

I agree, the future means constant changes and increased uncertainty. This would require ALM managers to stay awake and look into the future to spot possible changes, as well as be constantly prepared to act.

The challenge is that usually the old patterns will not work, as the situations are different. I can recall a number of stress tests conducted within the banks and none of them are similar to the real situation we are managing for over two years.

It’s about being open-minded, adjust thinking and acting to the new situation.

In my opinion there are two key factors for success in those times: First, having the right people in the team and efficiently cooperate with other area within the bank. Second, take advantage of technology development and focus on processes improvement/- automisation and look for opportunities and changes in business models.