Funding

While the definition of cash is fairly obvious for most businesses, this is less so for a
bank. The money-market business line of a bank has both deposits and obligations
with other banks and other market participants, of various maturities yielding
various rates. Other business lines deal in other instruments which are settled in
what they view as cash. Clarity is much improved by having a treasury desk with
which all other business lines have accounts which they regard as their ‘bank
accounts’. The treasury desk then functions as the in-house bank, charging interest
to those business lines that have borrowed from it, and crediting interest to those
which have deposited funds with it. Because of the fine margins in many trading
businesses this interest charge is usually a very material proportion of the profit/
loss of many business lines, and so its accuracy is extremely important.
The treasury desk will usually charge a spread to its internal customers, reflecting
the fact that there is a spread between the borrowing and lending rates in the market,
and will make a profit even if it charges no larger spread than the market as we see
from the following example: