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By Suresh Sankaran, Head of Risk Governance, Metro Bank
How has the COVID-19 pandemic impacted funds transfer pricing?
The transfer pricing process relies on the logical sourcing and use of funds in the banking ecosystem that is governed by the diktats of demand and supply. With the pandemic, there has been a push towards guaranteed lending in both retail and commercial sectors. Not only are these priced at suboptimal levels, they are also prone to larger-than-anticipated defaults, and so the transfer pricing framework will not work as expected. That is because the breakdown of margins between credit risk and mismatch risk is no longer controlled through market forces but by convoluted pricing mechanics that need to factor in the government guarantees and the higher than anticipated incidents of default. On the liabilities side, the close-to-zero and indeed, negative rates has resulted in a loss of stickiness of deposits, and customers have chosen to pay off household debts at record rates, and also used this opportunity to repay credit cards debt.