Head of Financial Engineering and Advisory Services Division
European Investment Bank
1. How would you describe the way loans are currently priced in banks? What are the main areas that could be improved?
In early 2012, sometime after BCBS and CEBS (now EBA) publications on liquidity cost benefit allocation, I discovered an interesting “occasional paper” on liquidity transfer pricing – the sub-title “a guide to better practice” caught my attention as being a fresh, modest and honest description of the “state of play” in the banking sector. I discovered that a “zero cost/benefit approach” towards liquidity consumers/providers was still prevalent for some banks at the time, even though the world of free interbank funding and lending had ceased to exist. Also, pool-based approaches of historical averages were common still, ignoring costs/benefits from longer lending/funding vis-à-vis shorter one and, on top, leading to conflicting prices vis-à-vis prevailing market conditions. Meanwhile, improvements have been put in place, term liquidity premia based on a maturity-matched, market based approach have become better practice. Still, things remain to be improved. We have entered a world of negative rates and FTP cannot ignore this. Likewise, more focus needs to be put still on contingent liquidity risk. Above all, a clear governance around a proper, centralized and consistent ILAAP is becoming a must.
2. How does loan pricing differ across the spectrum of banks of different sizes?
Frankly, I do not have much visibility on very small institutions, but I presume that a certain consensus is emerging across the board towards what one could call good practice in loan pricing: price and risk start going hand-in-hand, reliance upon cheap re-financing is no longer possible in loan pricing, a term structure of lending spreads (and, of course, rates) is the standard now. This being said, implementations still vary quite a bit between large and small banks, but more importantly between different types of business/funding models. Differences can be observed across dimensions such as: more dynamic vs. more static approaches, marginal vs. average cost of funds approaches, automated vs. more judgmental approaches, the level of granularity in which costs are allocated to individual loan products, inter-mingling vs. separation of equity funding in loan pricing, the question of whether and how derivative costs are allocated to loans, etc. pp. As usual, differences are revealed when it comes to the details.
3. Which regulatory developments in the financial field had the most dramatic impact on FTP from a strategic standpoint?
The 3rd Annual Funds Transfer Pricing Forum will be held on June 02-03, 2016 in Cologne, Germany. Click below to know more about the conference.