Fair pricing of marketed products and piloting of their margin
In a context of fair pricing of marketed products and piloting of their margin, credit institutions are becoming increasingly sensitive to new regulatory topics that impact their business model. To this end, they question the need to include these elements in the calculation of their internal transfer rate  (TCI) and on the modalities of this integration.
 this concept was introduced in a previous article of Finance & Strategy of Sia Partners blog
TCI systems implemented have for the purpose of transferring the management of the risks of rate and liquidity of the commercial sphere into the ALM sphere and thuspreserve the profit margin over time. For this purpose, the TCI must take into account all the characteristics, firm and optional contracts, but also the links between products (including active-passive links: for example, the collection of deposits capacityincreases when that the Customer subscribes to a credit…), in a legal and regulatoryenvironment in permanent evolution.
Thus, as was the case during the introduction of the Basel liquidity (LCR and NSFR) ratios, today the question arises of the impact that could have the novelties introduced by the application of the IFRS 9 standard on balance sheets and on the result ofbanks accounts, and therefore on their margins.
A permanent evolution of the TCI corpus
The challenge of the 2000s was to extract hidden models of pricing products equalization mechanisms and to substitute an economic vision reflecting the financial conditions increased by a bonus-malus system and to externalize business efforts on aproduct or specific client segment, and thus quantify effects cash generated (mainlythe grant of housing loans by sight deposits). In parallel, the scalability of the securitization programs prompted many institutions to pass, ex ante, the economies of equity and refinancing related in the margins of the products and thus improve their tariff positioning.
Since the 2008 crisis, work on the TCI are intended to measure the fair price of the operation, including incorporating the cost of liquidity, suddenly become a scarce resource. In parallel, it was necessary to encourage the marketing of the balance sheetproducts that improve the situation of liquidity of the Bank passing on the cost of liquidity all positive elements. For example: the earnings of collateralisation, the remuneration of permanent and secure refinancing programmes (the securitisation of credits, emissions of Covered Bonds…) or even the benefits of funding programs not perennial (MTRO, LTRO, T-LTRO, VT-LTRO)…, etc.
On the other hand, the objective to show the full cost of an operation and trade policy-oriented products less punitive from a regulatory point of view goes also through integration in the TCI to the extra costs incurred by the honouring of the liquidityratios LCR with the maintenance of a reserve of liquidity (in force since January 1, 2015) and NSFR (which will enter into force in 2018). LCR (and NSFR) component is now amply adopted by calculations of banks TCI systems, variable terms from one institution to another (packages are usually applied based on grids ‘ type of product / segment customer / maturity operation “) but who often have difficulties in implementation. Indeed, issues (maintenance of a pocket of liquid assets in the LCR sense by financial next to the nature of the commercial production) is located on the border between commercial and financial sphere and not on a purely financial vision.
Furthermore, the integration within the TCI of a component reflecting the increased cost of liquidity generated by respecting constraints in respect of LCR and NSFR (this surcharge ranging regularly in plate and price) calls into question the principle of stability of the TCI, and so the commercial margin stunning.
A new regulatory challenge on the horizon, a new challenge
The regulatory challenge of the next few months is represented by the introductionof the accounting standard IFRS 9, which introduces new constraints, including provisioning ante against credits “.
Standard IFRS 9, and more precisely the mechanism of impairment, provides, upon the granting of a credit, the recognition of a provision to deal with statistical potential losses. This system aims to impact, from the “the life of a credit t0′, the balance sheet of banks to build up reserves to use in case of deterioration of the quality of the credits.
The extra cost generated by this new provision must also be integrated into the TCIto measure the fair cost of each credit and so to objectify granting of ces-last to segments of clientele inducing more or less important provisions. But here too, the difficulty is related to the instability of the provision. The standard providing for a regular reassessment of the component
the TCI reflecting its cost will evolve depending on the base and the price.
The integration of the cost of liquidity and the new needs of provisioning related toIFRS 9 in the TCI allows to measure the right financial cost of an operation, and transfer all of the financial risk of the commercial sphere to the ALM, but questioning the first principle of TCI: secure in trade a margin trade that is stable over time (excluding client event as for example through an early repayment loan (, the renegotiation, etc.).
But ultimately is not the reflection of reality? More and more, given the introductionthrough the regulation of variable cushions face each risk today (liquidity and creditrates tomorrow?), function ALM is not impossible to guarantee a price of resources (or redemption) constant in time?
Banks are facing a trade-off: on the one hand of preserving the finesse in the calculation of the fair cost of the operation but causing a fix to its extent, the other the respect of the principle of stability in time of the flag but excluding from the elementsneeded for the materialization of the right price.