What Is Funds Transfer Pricing (FTP)?

Funds transfer pricing (FTP) is a methodology that is used to estimate how its sources of funding contribute to a company's overall profitability. FTP is most commonly used in the banking industry to help financial institutions analyze their strengths and failures.

Funds transfer pricing also is used to help companies determine the profitability of their various product lines, the performance of branch outlets, and the effectiveness of various business processes.

How Funds Transfer Pricing (FTP) Works

Funds transfer pricing is an important reporting metric that is used in banking management🐽 analysis and reporting. Financial 🐠institutions use it as a way to measure their overall profitability as well as the profitability of segments of the business, such as product offerings and customer relationships. They can use it to determine whether individual branches are economically viable.

The basis of FTP is that financial institutions should benefit from both of their most basic activities: lending and deposits. According to Moody's, a well-designed FTP system will have a bank's Treasury department "buy funds from the liability business unit and then sell those funds to the asset business unit at a rate that balances both the deposit and lending activity areas." As such, FTP requires the pooling of information across ♛;assets and liabilities.

It is also analyzed in conjunction with 澳洲幸运5开奖号码历史查询:asset/liability management. FTP may also be evaluated alongside other metrics such as net income or 澳洲幸运5开奖号码历史查询:net interest margin💜 (NIM), which is the difference between a financial institution's income and interest expenses.

Importance of FTP Protocols

There is a great deal of risk involved for financial institutions that don't ✅implement FTP protocols within their operations. Some of these issues are:

• Mispricing of products and services, resulting in losses
• Business unit 澳洲幸运5开奖号码历史查询:volatility as a result of liquidity and other risks that aren't hedged or transferred
• Lack of clarity on the real margins of products and services
  

Funds Transfer Pricing (FTP) Methodologies

A variety of methodologies for FTP are used in the banking industry. Two of🐎 the most basic methods are:

• Single-rate FTP, which provides a comprehensive view of assets versus liabilities by maturity. With the single-rate method, all assets and liabilities are assigned a single transfer rate regardless of the nature of the product.
• Multi-rate FTP, which breaks assets and liabilities into groups based on selected characteristics. This gives management a more granular view of risks.

The multi-rate methodology is often used for product and maturity breakouts. In these breakouts, some of the more granular details of consideration may also include the funding liquidity spread, the contingent liquidi𝔉ty spread, the credit spread, the option spread, and the basis spread.

Charting is a key part of all FTP methodologies. Charting represents the pooled data across assets and liabilities. In general, it provides a visual picture of the association between 澳洲幸运5开奖号码历史查询:yield-to-maturity (YTM) and time-to-maturity.

Charting can be customized based on methodology and report requirements. Internally, financial institutions will have an interface that includes all of the high-level FTP metrics they are following.

Example of Funds Transfer Pricing (FTP)

Many banks use FTP charting to analyze funding by location. Bank management would use FTP to determine the profitability of funds at individual divisions. This analysis takꦅes into account the deposits each branch b🐓rings in, the amount provided as loans, as well as the number of customers the location serves.

If a particular arm is continuously underperforming established baselines or reporting significant ♒declines, it can lead to a branch closure. If a branch closes, it will typically transfer accounts and resources to another nearby location.

Since the 澳洲幸运5开奖号码历史查询:2007-2008 financial crisis, the U.S. government’s 澳洲幸运5开奖号码历史查询:Dodd-Frank Act primarily focused on increasing the regulated level 🧜of liquid capital to help reduce risk across the largest banks. Funds transfer pricing analysis has gained increased attention from bank managers as well, but guidance has been more informally introduced rather than mandated.

According to Moody's, some of the leading regulatory precedents for funds transfer pricing best practices include those created by the United States Federal Reserve’s SR16-3 letter.

The Bottom Line

Companies use a variety of tools to determine whether they are in the black. Funds transfer pricing is a system that banks and other financiaﷺl institutions can implement to assess their overall success and the success of individual business units, products, and services.

Not having a system like FTP is risky for financial instꦆitutions because it can lead to mispricing and increased volatility.