With a booming Russian economy, financial services are in growing demand. How does Russian bank PSB* manage resource allocation among its roughly five hundred branches?

So much money flowing in. So much money flowing out. For a banker, life may seem like a long winding bathtub. This case (see reference below) describes the allocation methodology used by Russian bank PSB* (short for Promstroibank) based in Saint Petersburg, in the northwest of Russia.

For professor Pustovalova (click here for bio) the interest in this case resides in the financial algorithm that PSB bank established in order to rationalize the distribution of monies to its various branches spread throughout Russia. To make matters more complex, the Bank’s treasury also wishes to lay claim to the assets, since it can do financial marvels by investing funds in external markets that are not available to the PSB branch offices.

So given these competing demands, how does PSB manage? What systems does it create?

At the end of the 20th Century, Russian banking followed the ongoing political trend: passage from public hands to increasingly private investors. Promyshlenno-Stroitelny Bank of the USSR was no exception to this rule. In 1990 it started operating independently, i.e. as non-State-owned entity. In 1992, the long-named bank received a general bank license from the Russian Central Bank, and shortened its name to Promstroibank (PSB).

By early 2005, when the case occurs, PSB has more than 5,000 employees and 2,450 points of sale spread throughout Russia. PSB hosted more than 70,000 corporate accounts and over one million individual accounts. PSB benefited from a B+ rating from an international rating agency, and maintained business relations with over 550 partners in Russia and abroad.

Insert Chart 4 – Ranking of Russian banks

After decades of rigid state-directed financial services, the sudden banking liberalization of the 1990s carried its load of constraints. For PSB one of the limiting factors was the unequal level of financial expertise between headquarters and branch offices. This disequilibrium led to difficulties in the allocation of funds within the growing network of PSB operations.

As illustrated in the chart below, the sources of funds were basically two-fold. On the one hand were companies placing their cash holdings with PSB. On the other hand, increasingly wealthy Russians – the growing middle class for the most part – placing their savings in a bank instead of a mattress.

Insert Chart 1 – Sources and Uses of Funds

Demand for these available funds was also increasing. The growth of private enterprise was no longer State-funded as in the yesteryear; now banks, financial institutions and the stock market(s?) provided the funding. Demand also came from individuals, who wanted loans for short and long-term investments (e.g. automobiles, home furnishings, houses).

As is often the case, at times it was difficult for PSB managers to match the supply of funds with the demand for these funds. The first obvious mismatch was simply geographical: Krasnoiarsk might be a prime source of available funds (thanks to booming commodity business), but there were better options for uses of funds in, say, Chelyabinsk.

Another problem was to rank all the options for the use of funds. Should FSB privilege home loans in its hometown of St Petersburg? Or give precedence to less risky investments in companies in the Ural region? What balance should be defined between decision-making at the center (i.e. the headquarters) and the autonomy of the “good” branches? To help pave a smooth and rational path, FSB decided on a structure depicted in the chart below.

Insert Chart 2 – Treasury vs Branch vs Client

FSB also reinforced its resource allocation and risk governance structures. Within its headquarters, the bank allocated control functions to three entities:

  • ALCO: the Asset Liability Management Committee establishes the key parameters for intrabank transactions: the so-called transfer price, and the base interest rate;
  • TOD: the Treasury Operations Division calculates the transfer price and Base interest rate and sent its recommendations to ALCO;
  • RMO: the bank’s Risk Management Office calculates the risk factors to be used by TOD and ALCO, and also advised on currency, market liquidity and other risks.

Lastly, the operational division called FTPM (for Financial Transactions Processing Management) pulled together the various calculations from the branches and established the overall balance sheet based on actual transactions carried out by the branches (or by HQs, for example for Treasury department transactions in the currency hedging markets).

Whew! Quite a few checks and balances, eh?

At the crux of FSB’s resource allocation algorithm is its method for calculating the transfer price. Without going into details that are too deep (purchase the case for that!), suffice it to say that the transfer price is calculated based upon the loan currency, its term or duration, its strategic priority, and other factors.

Among the other factors, one worth noting is the Base Interest Rate (BIR), which is calculated by ALCO on the basis of two sets of factors.

ALCO first considers a set of three key interest rates: Sticky Interest Rates, Marginal Interest rates, and Adjustable (contract) Interest Rates. Theses three benchmark rates provide a framework for setting the transfer price.

The second correction factor is linked to the credit risk for the specific client. ALCO uses a two-dimensional correction table which considers firstly the type of activity of the borrower, and secondly the level of credit security.

Insert Chart 3 – Formula

So, in the end, FSB has a clean and neat method for calculating the transfer prices that should apply for lending from its branches. Or does it?

* Note: In 2007 FSB merged with VTB bank and became VTB Severo-Zapad.


  • ECCH case number 110-038-1
  • “Transfer pricing in the commercial bank management system”
  • Associate Professor Tatiana Pustovalova
  • St Petersburg State University (Russia), Graduate School of Management

Professor Profiles

Name: Tatiana A. Pustovalova

University: St. Petersburg State University

What area of research are you currently working on?

My research interests lie in the field of bank management. More specifically, this problem of credit risk management, both at the level of individual borrower and the bank’s loan portfolio as a whole.

A case study that you think is important. Why?
The most important case study for me is «Small Business Lending in Russia: A Case Study of Industry and Construction Bank in St. Petersburg, Russia». This case was written in co-authorship with my colleague from the University of St. Petersburg, Olga Patokina and James Kolari, Texas A&M University, and was published in the Journal of Finance Case Research in 2002.

A very recent business or management title you read, and its significant lessons.
I recently read John Pepper’s “What really matters – Service, Leadership, People, and Values”. What struck me in this book was how the author proved that in management there are no trifling matters: human relations, personal lifestyle, family values are equally important to success.

What is one of your well-liked teaching moments?
Most of all I love to use cases. It seems to me, cases help students switch from the abstract (theoretical) knowledge to specifics. When analyzing cases, students perceive new educational material in a novel way, and become aware of the complexity and multi-variant decision making in a particular situation.

What was your most interesting consulting assignment? Why?
It was work associated with the development of new regulations regarding lending practices to legal entities in a bank in St. Petersburg. This was a long time ago, when Russian businesses were taking their first steps. At that time, many Russian banks were reviewing their work and tried to restructure their business processes in accordance with international standards. Bank management and owners were aware of the importance of such innovations, but simultaneously local staff wished ‘work as usual’ and offered resistance to change. It was important to develop new high-quality products and convince the frontline staff that this was not just a fashionable trend, but also a necessity. It was a difficult but interesting experience.

If tomorrow you could occupy an executive function in any company, what function and company? Why?
It would be a large multi-branch commercial bank, just as when I started my professional career. My professional interests are related to bank management. As for functions, I was always interested in creating new products and services, developing internal regulations for the bank, and improving business processes.