Example: Transaction accounts

The treasury is offered money from transaction accounts by the commercial
bank department. What should the treasury pay for this money? The ideas we
have in mind are all more or less inspired by time series analysis.
1 Calculate the standard deviation or another quantile of a certain time period
of past balances. The proportion of today’s balance, which corresponds to
this quantile, could be lent to the treasury at the O/N rate. The remaining
part of the balance could be lent out at the O/N rate plus a spread. The
determination of the quantile and the spread is a business decision.
2 The term structure of liquidity for demand deposits as described above can
be used for transfer pricing in the following sense. The proportion of the
balance, which can invested at a given term, is determined by the term
structure. The used interest rate is taken from the yield curve at that term
plus or minus a spread. Again, the spread is a business decision.
3 Instead of taking quantiles as in 2, it is also possible to use the minimum
balances in this period.
4 The next approach uses a segmentation hypothesis of the customers which
contribute to the balance. Customers who do not receive any or do receive
only very low interest on their accounts are likely to be insensitive to interest
rate changes. Changes in market interest rates do not have to be passed
through to those customers. On the other hand, customers who receive
interest rates close to the market will be very interest sensitive. Now it is
obvious that the non-interest-sensitive accounts will be worth more to the
bank than the interest-sensitive ones. The business has then to make a
decision as to what price should be paid to the portions of the balance, which
have different interest rate sensitivities. The transfer price of the clearing
balance can then be calculated as the weighted average of the single rates.