medium · FRM Part 2 Liquidity & Treasury Risk
A bank utilizes a 'Funds Transfer Pricing' (FTP) system to manage its interest rate and liquidity risks.
If the Treasury desk charges a lending unit a 'matched-maturity' rate of 4.50% for a 5-year fixed loan, but the overnight funding rate is 2.50%, what is the primary purpose of this 200 bp spread in the FTP framework?
- To reflect the equity risk premium and cost-of-capital hurdle rate required by the bank's shareholders when pricing the loan.
- To provide the lending unit with a funding subsidy so it can compete more aggressively for volume in a tight, rate-sensitive credit market.
- To remove the 'free' maturity transformation profit from the lending unit and centralize the interest rate risk in Treasury.
- To account for the expected credit loss (EL) of the borrower over the full life of the loan facility.
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