Banking Operations, Treasury, and Funds Management
What the exam tests
This domain tests how funding, liquidity, and asset-liability management affect lending decisions. It covers cost of funds, maturity mismatch, liquidity risk, and the operational mechanics from disbursement to repayment.
Core rules
- Fund assets with liabilities of compatible tenor; a long-term loan funded by short-term deposits creates refinancing and repricing risk.
- Cost of funds is not the only treasury cost; include liquidity premium and the cost of holding capital.
- Manage maturity gaps and interest-rate gaps; a positive gap benefits from rising rates but adds risk if funding reprices faster than assets.
- Disbursement controls include conditions precedent, account verification, and confirmation that security is perfected.
- Repayment monitoring depends on accurate schedules, application of payments, and reconciliation.
Worked example
A ₦1bn five-year loan priced at 14% is funded by 90-day deposits at 9%, giving an apparent 5% margin. If deposit rates repricing to 13% after six months, the margin collapses to 1% while the asset remains fixed for five years. The reasoning shows that the spread is not locked in; either the loan should be floating-rate, or the bank needs longer-term funding or a liquidity premium.
Traps
Pricing off current deposit rates without a repricing assumption; ignoring the liquidity premium; funding long assets with short liabilities; and disbursing before security is perfected. Also watch for payment application errors that create false arrears.
Key points
- Match asset and liability tenors to control refinancing risk.
- Include liquidity and capital costs in pricing.
- Floating-rate structures reduce repricing mismatch.
- Disburse only after conditions precedent and perfection are confirmed.