When a resource falls outside the internal price, a bank's business areas could decide on their own

The transfer price would coordinate rates and funding. Where it leaves a resource out, or charges for it with a static average, the areas could go back to deciding on their own.

In its matched-maturity form, the transfer price assigns each transaction an internal rate that carries the bank's funding cost and is set at origination. The margin would thus be protected from the interest rate and funding risk that the price transfers. That would be the case in which coordination by price already works.

Whatever is left outside the price — collections, the customer relationship — or charged with averages — capital, marginal risk, cost to serve — is where one area can treat a resource as free and another reconciles the difference afterward. Adding models within each area would, by itself, leave that in place.

Our hypothesis: a Decision System within Execution on Decision Systems produces the marginal recovery cost and the marginal cost to serve as shared signals, so that they enter the price with which each area decides.

What does each area of your bank consume that your internal price leaves out?

The full Perspective, with its sources, is available on request.