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FRM Part II · FRM Exam Part II · Liquidity Transfer Pricing: A Guide to Better Practice

A bank uses a single pooled average cost of funds as its transfer price for all assets and liabilities. Which problem is most directly associated with this methodology compared with a matched-maturity curve?

The pooled approach ignores tenor, so long-dated assets look cheap to fund and business units are encouraged to lend long against short funding. The resulting maturity mismatch and liquidity risk accumulate centrally in treasury, unlike matched-maturity pricing, which charges tenor-specific costs.

  1. AIt causes business units to be charged different rates for the same tenor
  2. BIt encourages long-term lending funded implicitly with short-term liabilities because the pooled rate ignores tenor, leaving treasury to bear the mismatchCorrect
  3. CIt requires daily revaluation of every transaction
  4. DIt prevents treasury from holding any liquidity buffer

Explanation

A pooled rate is the same regardless of tenor, so long-dated assets appear cheap to fund and short-term deposits are under-rewarded, giving incentives for excessive maturity mismatch that accumulates in treasury. Different rates for the same tenor, daily revaluation and buffer restrictions are not features of the pooled approach.

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