"Do banks match fund fixed rate products to term?" one reader asked yesterday, querying one theme of our commentaries on fixed rates this week.For a response we asked Graham Hand, editor of Cuffelinks and a former bank treasury supremo at CBA, Colonial and State Bank.Hand wrote that, to answer that question, we needed to "consider these three points:"1. Every part of a bank that lends money is 'funded' by the bank's treasury function under an internal transfer pricing arrangement."If the retail bank lends on a five year fixed rate mortgage, it fixes the funding for five years with treasury. If the loan terminates early, treasury charges or pays the retail bank depending on how rates have moved since the loan was first written."So as far as the retail bank is concerned, yes, it match funds the fixed rate issue."2. This loan is one of thousands of transactions done in the bank each day which all feed into treasury's transfer pricing system, and treasury manages both A) the funding and B) the interest rate risk. "Whether treasury actually goes into the market and does a five year swap or issues five year funding depends on the overall position."So as far as treasury is concerned, whether it match funds depends on its overall view."3. When I worked in banking, the question of whether we actually 'match funded' a specific loan was challenged in court by a client who was hit with a large early repayment fee. "The court upheld the bank's rights, recognising that the transfer pricing system was a mechanism for efficient risk management and it was not necessary to go into the market and match fund every single deal. Clearly, this would be impractical.Hand concluded: "I would argue that as far as the bank is concerned, you were correct, that the bank match funds fixed rate loans."