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

A bank's treasury is designing a liquidity transfer pricing (LTP) framework. Which of the following best describes the primary purpose of LTP?

The main purpose of liquidity transfer pricing is to pass the cost, benefit and risk of liquidity to business units, so that pricing, product and growth decisions reflect the true liquidity impact of their assets and liabilities, aligning incentives with the bank's overall funding strategy.

  1. ATo allocate the cost, benefit and risk of liquidity to business units so that they internalize the liquidity consequences of their activitiesCorrect
  2. BTo set the regulatory minimum liquidity coverage ratio for each business line
  3. CTo eliminate all maturity mismatches between assets and liabilities in the banking book
  4. DTo determine the dividend payout ratio from retained earnings of each business unit

Explanation

LTP charges business units for the liquidity they use and credits them for liquidity they provide, so decisions reflect true liquidity costs. It does not set regulatory ratios, eliminate mismatches, or decide dividends.

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