1. F U N D
T R A N S F E R
P R I C I N G
IN BANKING
CHALLENGES
AND
MEASUREMENT
MECHANISMS
D A V I D B U Y C K
MASTER DISSERTATION
SEPTEMBER 3 2012
RD

2. A G E N D A
1. RESEARCH OBJECTIVE
2. LIQUIDITY RISK MANAGEMENT
3. FUND TRANSFER PRICING
3.1 FUNCTIONS
3 . 2 M E A S U R E M E N T M AT U R I T Y
3.3 CHALLENGES
4. NOVEL LIQUIDITY MEASURE
5. DISCUSSION OF FINDINGS
FUND TRANSFER PRICING IN BANKING: CHALLENGES & MEASUREMENT MECHANISMS

3. RESEARCH OBJECTIVE LIQUIDITY MANAGEMENT FUND TRANSFER PRICING NOVEL LIQUIDITY MEASURE
1. RESEARCH OBJECTIVE
INCONGRUOUS PRICING CALLS FOR FURTHER SCRUTINY
T h e r e s e a r c h a i m s a t u n d e r s t a n d i n g t h e f u n d a m e n t a l s o f F u n d Tr a n s f e r
P r i c i n g ( F T P ) i n t h e b a n k i n g i n d u s t r y.
The inconsistent application of transfer prices by UBS, in 2007, has
become infamous for FTP asymmetries as their transfer rates:
w e re n o t m a t c h e d t o t h e t e n o r o f t h e f u n d s p r o v i d e d ;
d i d n o t a c c o u n t f o r t h e n a t u re o r l i q u i d i t y o f a s s e t s a c q u i r e d ;
internal funding priced lower then the relevant LIBOR rate.
A re v i e w o f F T P p r i c i n g p o l i c i e s i s c a l l e d f o r
FUND TRANSFER PRICING IN BANKING: CHALLENGES & MEASUREMENT MECHANISMS DISSERTATION PRESENTATION DAVID BUYCK 3

4. RESEARCH OBJECTIVE LIQUIDITY MANAGEMENT FUND TRANSFER PRICING NOVEL LIQUIDITY MEASURE
2. LIQUIDITY RISK MANAGEMENT
2 . 1 A G G R E G AT E L I Q U I D I T Y: PA R A D I G M S H I F T
Money Neutrality has not held true, the Cambridge equation failed.
F I G U R E 1 : A G G R E G AT E M O N E TA R Y G R O W T H A N D L I Q U I D I T Y P R E F E R E N C E ( O W N I L L U S T R AT I O N )
25% 55%
(SOURCE: EUROSTAT) O P E N I N G I N C R E A S E M 1 A G G R E G AT E
SEPTEMBER 2008 (END-OF-MONTH)
20% 50%
15% 45%
10% 40%
5% 35%
M3 Aggregate growth (LS)
EZ HICP (all-items, unadjusted - LS)
M3 - HCIP Cumulated difference (LS)
M1 Aggregate (% Share of M3 - RS)
0% 30%
04M01 05M01 06M01 07M01 08M01 09M01 10M01 11M01 12M01
FUND TRANSFER PRICING IN BANKING: CHALLENGES & MEASUREMENT MECHANISMS DISSERTATION PRESENTATION DAVID BUYCK 4

5. RESEARCH OBJECTIVE LIQUIDITY MANAGEMENT FUND TRANSFER PRICING NOVEL LIQUIDITY MEASURE
2. LIQUIDITY RISK MANAGEMENT
2 . 2 A D YA D I C R I S K : M A R K E T & F U N D I N G L I Q U I D I T Y R I S K
Liquidity risk is the inability to fund asset growth and meet obligations,
without threatening the solvability of the institution.
F I G U R E 2 : T H E D U A L N AT U R E O F L I Q U I D I T Y R I S K
CAPITAL - BONDS
FUNDING
TREASURY APPROACH TO LIQUIDITY
WHOLESALE - CP - DEPOSITS LIQUIDITY
RISK
LENDERS OF LAST RESORT
CONTINGENCY
LIQUIDITY RISK
LIQUIDITY RISK
LIQUIDITY RISK
STRUCTURAL
FUNDING SOURCES DIVERSITY
TACTICAL
LIQUIDITY RISK
SECURED & LIQUIDATION FUNDING
STANDING FACILITIES
MARKET
REPOS LIQUIDITY
RISK
ASSETS
(MODIFIED: D’HAESE, 2009)
FUND TRANSFER PRICING IN BANKING: CHALLENGES & MEASUREMENT MECHANISMS DISSERTATION PRESENTATION DAVID BUYCK 5