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

When constructing the liquidity transfer pricing curve for core deposits with an estimated behavioural maturity longer than their contractual maturity, which treatment is most appropriate?

Core deposits should be credited at the transfer curve rate matching their estimated behavioural maturity for the stable portion, not their contractual overnight maturity. This rewards deposit gatherers for providing stable, longer-term funding and aligns incentives with the bank's liquidity needs.

  1. ACredit the deposits at the overnight rate because they are contractually on demand
  2. BCredit the deposits at the curve rate for their behavioural maturity, based on stable portionsCorrect
  3. CCredit the deposits at the loan yield they fund
  4. DAssign no credit, as deposits are costless funding

Explanation

Stable core deposits provide longer-term funding, so they should be credited at the curve point matching their behavioural maturity. Using contractual overnight maturity understates their value and the loan yield mixes revenue with funding value.

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