Page 1 of 1

accrual book

Posted: September 13th, 2004, 9:46 am
by unquantifiable
what does managing the accrual book in the treasury of a large commercial bank entail? any references to this in a rising interest rate environment would also be helpful.thanks

accrual book

Posted: September 14th, 2004, 1:11 am
by DavidJN
A major treasury function is managing the duration gap that often results when the duration of assets (e.g. loans etc) are longer than the duration of liabilities (e.g. LIBOR funding). A natural part of this activity is transfer pricing. By this I mean providing matched term funding to the lines of business (LOBs) who originate loans and mortgages, thereby allowing the LOBs to lock in a spread and simultaneously transferring interest rate risk to a centralized treasury who will fund as it sees fit, often taking advantage of risk offsets between various LOBs. The basic idea is to remove interest rate (and maybe credit) risk from the originators of loans and mortgages and transfer it to a centralized unit (the treasury) who manage it bank-wide. Note that the new hedge accounting rules make the life of the treasurer a lot harder, since "macro hedging" of the net risk of large bank portfolios is now frowned upon. Instead, banks have to micro-hedge (this/these specific asset(s) against that specific derivative(s)) to qualify for accrual accounting. Very impractical for the banking business where assets and liabilities are generated almost constantly, rather than very discretely.