Products with undefined interest and capital commitment are frequently found in European universal banks’ product portfolios and the margin on these products is a major source of net interest income. Managing these products and the resulting interest risk position depends on a professional method of transfer pricing which is becoming more and more important due to several reasons:
- Growing competition of banks for saving deposits due to expected regulatory requirements (e.g. LCR/NSFR) and the debt crisis, whereby pricing becomes a major factor of competition
- Pressure of regulator on banks to sufficiently validate interest and capital commitment assumptions
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