Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition

Appendix: Reserve requirement and transfer price

Let us assume that:

D	= deposits
d	= deposit rate
r	= central bank reserve requirement (in percentage of deposits)
R	= reserves with the central bank (R = r × D)
IA	= interbank assets
i	= interbank rate

Then we have:

Central bank reserves + interbank assets = deposits

Interest margin = revenue – expenses

R + IA = D

IA = D – R

Interest margin	=	(i × IA) – (d × D) = i × (D – R) – (d × D)
		= [i × (D – r × D)] – (d × D)
		= i × (1 – r) × D – (d × D)

The transfer price is the matched-maturity interbank rate adjusted by the central bank’s reserve requirement (i × (1 – r)).

Exercise: Stage Five

Q1: Here is the balance ...