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Answer: The real costs of the bank's liquidity cushion are best reduced through long-term funding.
**Correct Answer: A** **Explanation:** A is correct. The bank's liquidity cushion real costs are best reduced through long-term funding. This aligns with industry best practices where long-term funding provides more stable and predictable funding sources, reducing the need for expensive short-term liquidity buffers. B is incorrect. Contingent bank obligations such as collateral calls and committed lines of credit are assigned a liquidity transfer price when established, not only after the first drawdown. This ensures proper pricing of potential liquidity risks from the outset. C is incorrect. A matched-maturity marginal cost of funds approach is the most accurate transfer pricing formula, not a pooled average cost of funds approach. The matched-maturity approach better reflects the true economic cost of funding specific assets. D is incorrect. Liquidity transfer pricing should reflect the costs, benefits and risks of respective businesses, not the bank as a whole. This allows for more accurate pricing and better business decision-making at the individual business unit level. **Reference:** Joel Grant, 2011, "Liquidity Transfer Pricing: A Guide to Better Practice," Occasional Paper, Financial Stability Board, Bank for International Settlements
Author: LeetQuiz .
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A risk consultant has been hired by a bank to review and evaluate the bank's current liquidity transfer pricing (LTP) policy and recommend changes to it. The consultant reviews the governance of the LTP process and prepares a report based on industry best practices. Which of the following would be a correct recommendation for the consultant to make?
A
The real costs of the bank's liquidity cushion are best reduced through long-term funding.
B
LTP of contingent bank obligations, such as collateral calls and committed lines of credit, can only be conducted after the first drawdown.
C
A pooled average cost of funds approach is the most accurate LTP formula.
D
A liquidity transfer price should reflect the costs, benefits, and risks of the bank as a whole.