Treasury and Risk Management
Scope
Treasury and Risk Management tests ALM, liquidity, market risk, capital adequacy, and treasury controls. The exam expects calculation logic and control segregation.
Core rules
- Treasury deals in money market, FX, and securities; front office deals, middle office measures risk, back office confirms and settles. Segregation prevents fraud.
- ALM manages liquidity and interest-rate gaps. Rate-sensitive assets and liabilities are bucketed; a positive gap gains when rates rise, a negative gap loses.
- Market risk includes FX, interest rate, and equity risk; VaR estimates loss at a confidence level and horizon but is not a maximum loss.
- Basel III in Pakistan: SBP prescribes CAR (currently 11.5% including capital conservation buffer), CET1, LCR, NSFR, and leverage ratio. HQLA must be genuinely liquid.
- Stress testing and contingency funding plans are required.
Worked example
Tier 1 capital is PKR 80 million, Tier 2 is PKR 20 million, and RWA is PKR 900 million. CAR = (80+20)/900 = 11.1%. SBP's 11.5% minimum requires 900 x 11.5% = PKR 103.5 million, so the bank is short PKR 3.5 million. Reasoning: capital adequacy is measured against risk-weighted assets, not total assets.
Traps
- Letting front office confirm its own deals.
- Treating all deposits as stable for LCR.
- Counting illiquid securities as HQLA.
- Treating VaR as the worst possible loss.