Skip to content

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

Before the global financial crisis, many banks priced liquidity poorly or not at all. Which consequence is most closely associated with the absence of an effective LTP framework?

Without effective LTP, the liquidity costs of long-dated illiquid assets and contingent commitments were not charged to the businesses creating them. This encouraged excess growth in these exposures, funded by cheap short-term wholesale funding, leaving banks highly vulnerable when markets froze.

  1. AExcess holdings of high quality liquid assets across all business lines
  2. BUnderpricing of contingent liquidity commitments and long-dated illiquid assets, leading to excess growth in them and reliance on short-term wholesale fundingCorrect
  3. COverpricing of retail deposits, causing deposit outflows
  4. DPerfect alignment between business line incentives and the bank's liquidity risk appetite

Explanation

Without LTP, liquidity costs of illiquid assets and contingent commitments were not charged to the businesses taking the risk, which encouraged growth in those exposures funded by cheap short-term wholesale funds. This left banks vulnerable when markets froze. The other options describe the opposite of what occurred.

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