ASSET AND LIABILITY MANAGEMEN Gz Imagine that the term depasis! colnctert hy the branch in central Paris (70) have a maturity of one year, that the three mants-to-maturty interbank rate is 5%, that the ‘ane-yeal-o-matusity interbank rate is 6%, and that the bank pays 4%b on deposits, ‘The Interest margin on the deposits wil be calculated as folous: Interest margin on deposits = (686 x 70) - (496 x 70) = 14 A very similar reasoning wil apply to the evaluation af the interest margin on loans. [7 Imagine that the matunty of consumer and corporate loans is one and two years espectuely, hat the one-year and two-year-maturty inlerbank rates are respectively (6% and 74 and thal you charge 10% on consumer loans and 7596 on corporat loans. The interest margin on loans forthe branch in central Pais is caleulated as follows: Interest margin = margin on consumer loans + margin on corporate loans [(10% ~ 69%) x 60] + [7.5 %~ 796) x 40] = 2.6 ‘The net interest margin on deposits and loans fa the branch is Total net interest margin = margin on deposits + margin on loans =14+26=4 > (GD Manageriat rule A managerial rule follows from the choice of the transfer price: The main objective n collecting deposits and making loans isto increase the net Interest margin, Each margin is calculated vis-a-vis the matched-atuily maiginal valve of fund ‘The lugte of transfer pricing for deposits and loans can be visualized as shown in Figure $.1 I is as if the deposits collected by the branches were transferred to e- Bank’ treasury, the branches receiving as Income the MMMVF. It is as if the loans granted by the branches were funded with money lent by the treasury at the MMMVE As branch managers collect deposits and grant loans to increase their net anterest margin, it can often happen that the maturities of deposits and with no reserve raqutement 30