Employing Transfer Prices for Funds Balancing at the Commercial Bank: The Case of Bank Saint Petersburg (Case Study)

Abstract

This case studies a question of allocating responsibilities for balance sheet risk management between bank divisions. Taking deposits and lending credits to its clients, сommercial banks face various types of risks caused by asymmetric resources. Abilities to apply transfer pricing correctly plays an important role in successful control and risk management, in balanced work of bank divisions and financial results improvement. The case is based on practical experience of a high-street Russian commercial bank and replicates discussion between bank managers at the bank Asset and Liability Committee meeting (ALCO). An important focus of this discussion is application of funds transfer pricing (FTP) system in managing divisions. Raised conflict between divisional interests and goals of Treasury is widely described in the case study. Сase study analysis sets the following objectives: to demonstrate place and role of funds transfer pricing system in bank management process, consider various options of FTP system implementation, analyze their advantages and disadvantages, show the particular importance of this system in managing bank’s balance risks, understand the high-street bank organizational structure and the mechanism of interaction between its units. Currently, this case study is used in teaching the course “Banking Management” and it is recommended for students of undergraduate and graduate programs. Students got an opportunity to analyze advantages and disadvantages of the new system offered in case, complexity and interrelationships of interests of various bank structural divisions in managing process and to understand the complex process of introducing changes in a high-street commercial bank. The case study enables students to understand how to use transfer pricing system to balance resources between departments, how to recognize and manage balance sheet risks.