3.14.6.1 Breakage Charges

A Breakage Charge represents the cost of breaking a contractual obligation. In Bank Finance this means the early prepayment of a loan by a customer or the early withdrawal of deposit funds by a customer. “Early” in this sense means before the contractual maturity date.

The gain or loss to the Bank from such early prepayments and withdrawals is the opportunity cost of not being able to replace the spread earned on the asset or deposit being lost. For example, the early withdrawal of funds from a 2-year Term Deposit exposes the bank to the risk of replacing that funding in a higher rate environment and thereby reducing the Net Interest Margin earned before the withdrawal. With Matched-Term Transfer Pricing, this risk is split between the Line Unit and Treasury. The Line Unit holds the risk of deteriorating credit spread, but Treasury holds the funding risk (the risk that the funding spread between the Bank's assets and liabilities will narrow).

The following Breakage Charge methods are available including:

• Economic Loss
• Fixed Amount
• Fixed Percentage