Treasury Risk Management in Banking: CAIIB BFM Complete Guide

Understanding this topic not only helps you crack the exam but also gives you a real understanding of how treasury functions control liquidity, interest rate, and market risks in banks.
In this article, you’ll find:

• Detailed explanation of Treasury Risk concepts
• Full coverage of CRR, NDTL, Stop-Loss, Front-Mid-Back Office
• Important exam questions for practice
• Video section for self-study

🎥 Video Lecture:

1️⃣ Treasury Risk – A Senior Management Concern

Treasury risk is a critical area because banks operate with high leverage, managing massive volumes of funds daily.
Even a small misjudgment can cause substantial financial losses, impacting reputation and regulatory standing.

• High Stakes & Exposure: Large-volume transactions make treasury operations sensitive to market movements.
• Reputation Risk: A single treasury loss can invite media and regulatory scrutiny.
• Profitability Impact: Interest rate volatility directly affects Net Interest Income (NII).
• Leverage Sensitivity: Minor rate changes can magnify losses due to high leverage ratios.

2️⃣ High Leverage & Risk Amplification

Leverage means using borrowed funds to increase potential returns. In banking, deposits form the main source of leverage.
A 1% movement in interest rates can dramatically affect profitability. This is why treasury continuously monitors Duration Gap, BPV (Basis Point Value), and VaR.

3️⃣ Treasury Responsibilities in a Bank

• Fund Mobilisation & Deployment – managing borrowing and investment.
• Liquidity Management – ensuring daily fund availability.
• Interest Rate Risk Management – aligning assets and liabilities.
• FX & Currency Risk Management – hedging forex exposures.
• Risk Monitoring – daily reports to ALCO and top management.
• Compliance – following RBI’s guidelines on risk limits and exposure.

4️⃣ NDTL Calculation (for CRR Purpose)

NDTL = Demand Liabilities + Time Liabilities – Deposits of Other Banks

Banks must maintain CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) based on their NDTL.
Understanding what constitutes demand and time liabilities is essential for both exam and practical banking.

5️⃣ Demand & Time Liabilities

• Demand Liabilities: Payable on demand – current and savings deposits.
• Time Liabilities: Fixed-term deposits, term borrowings, and certificates of deposit.
• The proportion between DL & TL defines liquidity risk and maturity profile of banks.

6️⃣ Treasury Structure – Front, Mid & Back Office

7️⃣ Difference Between Mid & Back Office

8️⃣ Stop-Loss Limit & Risk Mitigation

Stop-loss limit is the pre-determined maximum loss a trader or desk can take on a position before it must be closed.
It’s one of the most effective tools in risk containment.

• Helps control losses during volatile markets.
• Ensures discipline and accountability in trading.
• Works with Position Limit, Dealer Limit, and Value at Risk (VaR) Limit.

Other mitigation methods include hedging, diversification, and stress testing.

9️⃣ Additional Key Concepts for CAIIB BFM Exam

• Liquidity Coverage Ratio (LCR): Ensures banks maintain high-quality liquid assets to cover 30-day cash outflows.
• Interest Rate Sensitivity: Measurement of how NII or market value changes with rate movements.
• Gap Analysis: Identifies mismatches in maturity buckets of assets and liabilities.
• Duration Gap: Measures interest rate risk sensitivity using duration weighted assets/liabilities.
• Value at Risk (VaR): Measures potential loss in portfolio over a period under normal market conditions.

Treasury Management & Products in Banking | CAIIB BFM Module C Explained

🔟 Important Questions for Practice (Exam-Oriented)

• Explain why Treasury Risk is a Senior Management Concern.
• What is High Leverage? How does it amplify risk in banking?
• Describe the responsibilities of a Treasury Department in a commercial bank.
• Define NDTL and explain its relevance for CRR maintenance.
• Differentiate between Demand and Time Liabilities.
• List the functions of Front, Mid, and Back Office in Treasury operations.
• Explain the importance of Stop-Loss limits and risk mitigation measures.
• How is Liquidity Coverage Ratio (LCR) calculated and what does it indicate?
• Differentiate between Static and Dynamic Gap Analysis.
• What are the roles of ALCO (Asset Liability Committee) in risk management?
• Explain VaR and Stress Testing in Treasury Risk control.
• Describe how Interest Rate Derivatives are used to hedge risk.
• Explain “Duration Gap” and its role in Interest Rate Risk Management.
• How is mark-to-market valuation useful for treasury control?
• Discuss how RBI guidelines govern Treasury operations in Indian banks.