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

When a bank sets the term structure of its internal transfer curve for stable core deposits, which approach best reflects the behavioural nature of these balances?

Deposits should be credited using their estimated behavioural maturity, separating stable core balances from volatile ones. This recognises the longer-term funding value of sticky deposits, whereas using contractual overnight maturity understates it and crediting at the loan rate or at zero distorts business-unit incentives.

  1. ACredit the deposits at the overnight rate because contractually they can be withdrawn on demand
  2. BCredit the deposits at a rate based on their estimated behavioural maturity, after separating stable from volatile portionsCorrect
  3. CCredit the deposits at the loan rate of the business unit that uses the funds
  4. DCredit the deposits at zero so that treasury retains all benefit

Explanation

Core deposits are often stickier than their contractual maturity suggests, so crediting them on an estimated behavioural maturity, with volatile portions treated as short-term, rewards the deposit gatherer for stable funding. Overnight crediting ignores that value, and loan-rate or zero crediting distorts incentives.

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