Explanation:
Banks inherently engage in maturity transformation by taking short-term liabilities (like deposits) and using them to fund long-term assets (like loans). This creates liquidity risk because the funding must be repeatedly rolled over. Proper liquidity transfer pricing (LTP) is required to ensure that the cost of this liquidity risk is accurately attributed to the business units generating it, preventing excessive and unpriced maturity transformation.
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20.15.1. What is the primary (valid) reason that banks need proper liquidity transfer pricing (LTP)?
A
Because banks engage in maturity transformation
B
Because there is a lack of liquidity transformation products in the marketplace
C
Because the true economic cost of liquidity risk is approximately zero
D
Because markets are volatile; e.g., volatility 1-year LIBOR/Swap spread
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