Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/27931
Authors: 
Heidorn, Thomas
Schmaltz, Christian
Year of Publication: 
2009
Series/Report no.: 
Working paper series // Frankfurt School of Finance & Management 125
Abstract: 
Banks are liquidity brokers: they acquire it at the market in form of deposits and lend it in form of loans. As liquidity is not for free, the costs of its acquisition have to be transferred to those (departments) that lend it. Furthermore, banks take liquidity risk. The costs to hedge this risk have to be transferred to those that bring this risk into the bank. We propose a pricing framework that consistently prices both liquidity and liquidity risk in banks. The transfer prices are based on the cost that liquidity and liquidity risk imply (cost-based pricing) and linked to market variables to avoid discretionary biases. Using a representative balance sheet of a commercial bank, we demonstrate the application of our approach. Our approach ensures that banks incorporate liquidity cost (often neglected so far) in customer prices. Furthermore, they comply with the sound principles of liquidity management that explicitly require a liquidity transfer pricing.
Subjects: 
Liquidity
liquidity risk
cost-based pricing
funds transfer prices
bank controlling
JEL: 
G21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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