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

A bank's treasury sets an internal charge for funding that business units use to originate long-dated loans, and credits units that raise stable deposits. Which statement best describes the primary purpose of a liquidity transfer pricing (LTP) framework?

The main purpose of liquidity transfer pricing is to allocate the costs, benefits and risks of liquidity to the business units that create them, so that product pricing and performance measurement reflect liquidity risk and incentives match the bank's liquidity risk appetite.

  1. ATo allocate the costs, benefits and risks of liquidity to business units so that their incentives align with the bank's liquidity risk appetiteCorrect
  2. BTo set the interest rate paid to retail depositors so that it equals the central bank policy rate
  3. CTo remove all interest rate risk from the banking book by hedging it with derivatives at the group level
  4. DTo calculate the regulatory liquidity coverage ratio for each business unit separately

Explanation

LTP attributes liquidity costs and benefits to the activities that generate them, so that pricing, performance measurement and decisions reflect the liquidity risk taken. The other options describe deposit pricing, interest rate hedging or regulatory ratio calculation, which are not the core purpose of LTP.

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