Skip to content

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

A retail branch gathers a large pool of stable core deposits, while the corporate lending unit funds 5-year loans. Under best-practice LTP, how should the deposit-gathering unit be treated?

The deposit-gathering unit should be credited a transfer rate that reflects the behavioral maturity of its stable deposits, since they provide longer-term funding than their contractual terms suggest. Using contractual overnight maturity or giving no credit would remove the incentive to gather stable funding.

  1. AIt should be credited a transfer rate reflecting the liquidity value of the behavioral (stable) maturity of its depositsCorrect
  2. BIt should be charged the overnight rate since deposits are legally callable on demand
  3. CIt should receive no credit because deposits are already recorded as liabilities
  4. DIt should be credited at the lending unit's customer loan rate

Explanation

Best practice values deposits based on behavioral maturity, rewarding stable funding. Using contractual overnight maturity understates their value; crediting at the loan rate mixes in credit spreads and margin; no credit removes incentives to gather deposits.

Did you get it right without looking?

One question tells you little. A timed set on Liquidity Transfer Pricing: A Guide to Better Practice shows your real accuracy, how long you take and where you lose marks.

Practise Liquidity Transfer Pricing: A Guide to Better PracticeFree diagnostic mock

More Liquidity Transfer Pricing: A Guide to Better Practice questions