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

Under good practice for LTP, which treatment of a stable core retail deposit base is most appropriate?

Stable core retail deposits should be credited with a liquidity benefit based on their longer behavioral maturity rather than their contractual on-demand term. This rewards the unit for providing stable funding and gives the right incentive to gather such deposits, consistent with sound LTP practice.

  1. ACredit the deposit-gathering unit with a liquidity benefit reflecting the longer behavioral term of the stable funding it providesCorrect
  2. BCharge the deposit-gathering unit the full cost of overnight funding because deposits are legally callable on demand
  3. CIgnore the deposits in LTP and allocate their value to the treasury only
  4. DCredit the unit at the shortest-tenor internal rate to remain conservative

Explanation

Good practice uses behavioral maturity, so stable core deposits earn a credit for term funding value. Using contractual maturity or crediting only the treasury fails to reward the funding provider and distorts incentives.

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