What Is Funds Transfer Pricing – FTP?
Funds transfer pricing (FTP) is a method used to measure how funding is contributing to overall profitability for a firm. The FTP process is most often used in the banking industry as a means for analyzing the areas of strength and weakness within the funding of the institution. FTP can also be used to indicate the profitability of different product lines, maturities, branches, and more.
FTP is an important reporting metric used in banking management analysis and reporting. It requires the pooling of information across assets and liabilities. Commonly, it is also analyzed in conjunction with asset/liability management. Additionally, it may be evaluated alongside other metrics, such as net income or net interest margin.
There are a variety of methodologies for FTP used in the banking industry. Two of the most basic methods include single-rate and multi-rate. Single-rate 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. The multi-rate method breaks assets and liabilities into additional groups based on selected characteristics. With the multi-rate method, management has 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 liquidity spread, the credit spread, the option spread, and the basis spread.
- FTP is a method used to measure how funding is contributing to overall profitability for a firm.
- Most global regulators have not incorporated FTP analysis into comprehensive bank regulatory reporting. However, it is an important metric for internal analysis with several regulatory guidelines provided for industry best practices.
- The single-rate and multi-rate methods provide two basic systems for internal FTP analysis.
Charting Funds Transfer Pricing
Charting funds transfer pricing is a component of all methodologies. FTP charting is the result of pooled data systems across assets and liabilities. In general, FTP curves chart the relationship between yield to maturity and time to maturity. Charting can be adjusted based on methodology and analysis. Internally, banks typically have a dashboard that includes the high-level FTP metrics they are steadily following.
Real World Example
Many banks use FTP charting to analyze funding by location. In this example, bank management would use FTP to determine the profitability of funds at individual branches. This analysis takes into account the deposits each branch brings in, the amount provided as loans, as well as the number of customers the location serves. If a particular branch is continuously underperforming established baselines or reporting significant declines, then it can lead to a branch closure decision. If a branch is closed, accounts and resources will typically be transferred to another nearby location.
Industry Best Practices
Since the 2008 Financial Crisis, the government’s Dodd-Frank Reform Act has 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 by bank managers as well but guidance has been more informally introduced rather than mandated.
As of 2019, some of the leading regulatory precedents for funds transfer pricing best practices include the United States Federal Reserve’s SR16-3 letter, a paper by the Committee of European Banking Supervisors, and a paper by the Bank for International Settlements.