avantage has made a submission as part of The Committee of European Banking Supervisors (CEBS) public consultation on its advice on liquidity risk management: the second part of its response to the European Commission's Call for Technical Advice No.8.  (CP 19).

Recommendation 2 seeks an internal cost allocation mechanism that incorporates all costs of liquidity whilst at the same time providing a vehicle for incentivising appropriate behaviours to liquidity through a transfer pricing mechanism.

This paper notes that the CEBS is seeking to combine two often contradictory objectives by providing examples of how the more accurately a mechanism that captures and allocates funding costs the less effective it becomes as a vehicle for incentivising appropriate behaviour. Hence the need to decouple the recommendation into two objectives achieved through two separate mechanisms: cost allocation and transparent transfer pricing.

Download a copy of our submission here.