Banks in emerging markets have worked hard to hone their credit-risk-management skills over the past decade, and many of them deliver credit-related services and returns on par with those of their world-class competition. Yet they lag behind their counterparts in developed markets in managing market risk and in applying this knowledge to the treasury unit.

For banks in developed markets, the treasury unit has long been a source of profit, but it remains a support function for many institutions in emerging markets. We interviewed executives at 14 banks in Latin America, the Middle East, and Southeast Asia. At 9 of them, the focus of treasury activities was short-term liquidity management: ensuring that funds are available to meet regulatory reserve requirements and the immediate needs of customers. Board members and top managers at many of these banks view certain common treasury activities—for example, trading securities and developing derivatives contracts—as forms of casino finance.

In much of the developed world, a bank's treasury, in addition to managing liquidity, is responsible for managing assets and liabilities, trading in currencies and securities, and developing new products. High-performing treasuries systematically identify, mitigate, and profit from market risk—that is, risk associated with changes in interest rates,...