Banks Face New Era of Permanent Volatility

For managers working within treasury and balance sheet risk, the danger is no longer simply predicting the next market move - it is ensuring institutions remain flexible enough to survive a world where the underlying assumptions driving risk models may no longer hold.

That warning emerged repeatedly during a panel discussion featuring treasury and risk executives from large international banks and major North American financial institutions, who argued that geopolitical instability, inflation volatility and structural shifts in liquidity behavior are forcing treasury and ALM functions into a fundamentally different operating environment.

Speaking at CeFPro’s Treasury & ALM USA conference, the Head of Treasury at a large international European bank said uncertainty itself has become the defining market condition.

“Although answers vary, I think one thing people would agree to is high level uncertainty,” the executive said, pointing to developments ranging from tariffs and weakening labor data to conflict in the Middle East and oil price volatility.

The executive warned that stagflation is becoming an increasingly realistic threat for banks because it disrupts traditional market relationships that treasury teams have historically relied upon.

“If you think about traditional negative correlation between stocks and bonds, that works only when growth and inflation move in the same direction,” she explained. “That traditional relationship breaks down in a stagflation environment.”

The Director of Quantitative Analytics at a major North American bank agreed, arguing that central banks now face conflicting pressures between inflation control and weakening employment conditions.

“Fed is really caught between a rock and a hard place,” the executive said, noting weakening labor market data alongside persistent inflation risks.

A senior treasury executive at a major global investment bank argued that treasury and ALM teams have spent much of the past decade operating under unusually supportive market conditions that are now rapidly disappearing.

“For much of the past decade, treasury and ALM have operated in an unusually benign environment,” he said. “Low rates, abundant liquidity, stable correlations, predictable central bank support. That dynamic is changing.”

Instead, banks are increasingly confronting geopolitical fragmentation, inflation volatility and accelerated deposit mobility, developments that speakers argued are transforming treasury from a largely operational discipline into a far more strategic function.

The panel repeatedly returned to the importance of stress testing and scenario analysis as banks attempt to adapt to rapidly shifting market conditions.

Executives stressed that geopolitical shocks can no longer be viewed as isolated tail risks because their impact now extends directly into liquidity, interest rate exposure, deposit behavior and balance sheet strategy.

The quantitative analytics executive at the North American bank said institutions are increasingly focused on whether longstanding assumptions surrounding non-maturity deposits remain reliable.