hard · FRM Part 2 Liquidity & Treasury Risk
A funds-transfer-pricing (FTP) framework charges business lines a liquidity-term premium based on the contractual maturity of their assets and credits deposits based on their behavioral (modeled) life. A relationship-banking unit originates 10-year fixed-rate loans funded notionally by 'sticky' retail deposits with a 7-year modeled behavioral life. Treasury raises actual funding via 3-year senior debt and rolls it.
From a contingent-liquidity-risk standpoint, what is the most important flaw this FTP design hides from the business line?
- The FTP charges the loan as if 7-year deposit funding is available for its life, but the firm's real funding is 3-year debt that must be rolled — concealing rollover/refinancing risk and the cost of the term-liquidity gap beyond 3 years from the business line that creates it.
- The FTP overcharges the business line because behavioral deposit life (7 years) exceeds the 3-year actual funding tenor, so the unit is paying a term premium for liquidity it does not consume.
- The flaw is that deposits should be credited at contractual (overnight) maturity, not behavioral life, which would make the 10-year loan appear fully funded and eliminate the liquidity gap entirely.
- The design correctly transfers all liquidity risk to Treasury via FTP, so the business line bears none and the only residual issue is basis risk between fixed loan rates and floating senior-debt coupons.
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