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Probably the core function of a treasury department at any bank is the measuring, monitoring, and controlling of interest rate risk (IRR). IRR is the risk that changes in prevailing interest rates will adversely impact the value of the bank's assets and liabilities.

The actual level of involvement of a treasury department in interest rate risk management varies by institution, but generally speaking, the department would forecast net interest income (NII) and measure the sensitivity of NII to changes in rates. Typically the department would employ a variety of standard and proprietary models to measure this risk.

The output of this analysis would be supplied to the institution's ALCO (Asset/Liability Management Committee). ALCO is responsible for overseeing a variety of asset and liability (ALM) activities including the establishment of guidelines for the bank's risk tolerance levels.

The treasury department may further be tasked with ensuring IRR stays within guidelines set by ALCO by entering into a variety of financial transactions, such as interest rate swaps, futures contracts, and so on.

There are other functions often housed within the treasury department, including a process known as funds transfer pricing (FTP). At a high-level, the FTP process centrally manages the funding requirements of the entire bank in lieu of having each division fund its own balance sheet.

Additionally, the department may assume responsibility for monitoring the institution's risk capital levels including the rules set forth in Basel II.

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Q: What are the main functions that are performed by treasury department of a bank with international operations?
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