How treasury departments can refresh their technology to manage long-term inflation

In an effort to curb spiking inflation, the U.S. Federal Reserve raised interest rates 11 times between March 2022 and July 2023 — the steepest increase the country has seen since the 1980s. Central banks across Asia and Europe initiated similar increases. While inflation has cooled from its peak of 9.1% in June of 2022, it remains elevated above the Fed’s target of 2%. With markets pricing in the impact of ongoing inflation, banks need to update their approach to managing cash flow and liquidity to maintain capital requirements. Additionally, bank treasury departments need comprehensive tools to mitigate risk and guide profitability in an inflationary environment. 

Timely data and accurate analytics are crucial 

Pervasive uncertainty in the markets demands that banks evolve beyond their current tools and capabilities to establish a comprehensive risk, governance and compliance framework within the treasury department. Technology — specifically, digital solutions that provide access to decision-making data and relevant analytics capabilities — plays a key role in helping banks evaluate assets and sources of funding in real time, as well as streamlining treasury department activities. 

An inflationary environment presents challenges to financial institution treasury departments by increasing the volatility of assets and sources of funding. Spikes in inflation can also lead to rapid fluctuations in currency exchange rates. To mitigate related risks, treasury departments need to monitor macroeconomic conditions including regulatory changes, political uncertainty and rising interest rates. They also need quick access to information on bonds, current CPI indices, inflationary data, pricing and other data that informs decision-making.  

However, bank treasury departments historically rely on pre-dated data, in the form of aggregated contracts, positions and cash flows for example, that in the best cases, are already one day old. Given current market conditions, particularly when benchmarks and fiat assets behave with significant volatility, real-time access to data is needed to help match the institution’s risk appetite. Furthermore, some of the data models that treasurers use today rely on deterministic approaches that fail to capture correlations between external and internal factors that affect such data, largely due to technological constraints, while other models require heavy calculations. 

Leading digital solutions for treasury departments incorporate data capture and analytics into a seamless flow of activity from front-office functions, such as pre-trade analysis, trade capture and execution, to back-office operations, like clearing and settlement. Data analytics tools should incorporate information from across the institution as well as third-party sources to spot trends and reveal insights. But maintaining up-to-date data analytics models has traditionally been a pain point for financial institutions, particularly among community and regional banks that run models on a quarterly basis. 

Reducing risk through cloud-based technologies and APIs 

When it comes to adapting the treasury department to function effectively in an inflationary economic environment, new cloud-based technologies can make it easier to quickly integrate new products with existing core treasury solutions. These tools use microservices‑based architecture and APIs to create seamless interoperability. For example, treasury departments can leverage APIs to “plug and play” new fintech products that enable them to facilitate trades more smoothly and reduce risk. These interconnected solutions allow departments to integrate internal information and their trading/hedging books to run risk analysis like Interest Rate Risk of the Banking Book (IRRBB) or Expected Credit Loss or leverage advanced tools that enable machine learning capabilities to capture “tail risk” for advanced balance sheet stress testing and modeling.  

As a result, banks are better able to predict and address inflation‑related changes, such as lending rates and potential asset-liability mismatching. Having these tools in place allows treasury departments to be better positioned to protect their institutions and investors against evolving market headwinds. Finally, implementing straight-through-processing solutions ultimately allows a treasury department to create a streamlined and transparent risk and governance framework. 

Elevated inflation and higher interest rates are here to stay for the foreseeable future, and bank treasury departments must adapt accordingly to potential future interest rate hikes and hawkish monetary policy. To stay agile, competitive and —most importantly —profitable, bank treasury departments will need to invest in enhanced access to data that can provide a real-time view of interest rates to calculate sensitivities and overall exposure.  

Provi De Leon is the Managing Director Treasury & Capital Markets Americas at Finastra