What does {term} mean Funds Transfer Pricing - FTP

Funds transfer pricing (FTP) is a method used to individually measure how much each source of funding is contributing to overall profitability for a firm. The FTP process is most often used in the banking industry as a means of outlining the areas of strength and weakness within the funding of the institution. FTP can also be used to indicate the profitability of the different product lines and each staff member, as well as act as a great medium for comparison between employees, branches, etc.

The strategy behind FTP is to provide a representation of the profitability of each funding source based on its operational needs and the functions of the two primary divisions: lending and deposits. This information may also be evaluated alongside other metrics, such as the company’s net income or net interest margin.

BREAKING DOWN Funds Transfer Pricing - FTP

Pooling Methods

When pooling information regarding assets and liabilities, an institution may choose from four primary options. Using the single pool method, all assets and liabilities are assigned a single transfer rate regardless of the nature of the product. The double pool method separates assets from liabilities with an average loan rate assigned for all open loans and the mean deposit rate for all deposits. The multiple pool method breaks assets and liabilities into additional grouping based on selected characteristics, while the matched maturity method groups items based on their current maturity.

Funds Transfer Pricing Curve

To gauge FTP, banks can first establish a FTP curve. A general curve is calculated by plotting the relationship between yield to maturity and time to maturity; it is then adjusted to reflect the financial needs of each location, creating a point of analysis regarding whether a branch is performing to a level necessary to support its continued operations.

Additional adjustments may be made in order to more accurately represent the actual costs of funding a location. This can include, but is not limited to, the funding liquidity spread, the contingent liquidity spread, the credit spread, the option spread and the basis spread. Each adjustment is designed to compensate for the varying levels of risk that may be present in each asset or liability.

Branch Closure Decisions

In banking, the FTP can be used to determine the profitability of individual branches. This takes into account the amount of deposits each branch brings in, the amount provided as loans as well as the number of customers the location serves. If a particular branch sees declines in these areas, it can be used as a factor in determining if the branch should continue to operate or be closed. If the branch is closed, the accounts based within that branch are transferred to another nearby location.