FRM Part II · FRM Exam Part II · Liquidity Transfer Pricing: A Guide to Better Practice
A bank's retail unit raises a large pool of stable core deposits. Under a sound LTP framework, how should the unit be treated for the stable portion of these deposits?
The retail unit should be credited for stable core deposits at a longer-tenor funding rate reflecting their behavioral maturity, not the contractual on-demand maturity. This rewards the unit for providing stable funding and aligns its incentives with the bank's liquidity strategy.
- ACredited with a funding benefit reflecting the longer behavioral tenor of the stable balances, rather than the contractual overnight maturityCorrect
- BCredited at the overnight rate because the contractual maturity is on demand
- CCharged a premium because deposits create liquidity risk
- DGiven no credit, since deposits are already a cost of the business
Explanation
Sound LTP uses behavioral maturity, so stable core deposits earn credit at a longer-tenor funding rate that reflects their stability. Using contractual overnight maturity would undervalue them and discourage deposit gathering.
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