Funds Transfer Pricing (FTP): What It Is and How It's Calculated

What Is Funds Transfer Pricing (FTP)?

Funds transfer pricing (FTP) is a system used to estimate how funding is adding to the overall profitability of a company. FTP sees its most significant use in the banking industry where financial institutions use FTP as a way to analyze the strengths and failings of the firm within the institution. Funds transfer pricing may also help with determining the profitability of various product lines the bank offers, the performance of branch outlets, and judge the effectiveness of processes.

Note that FTP is different from transfer pricing, an accounting practice that represents the implied prices that one division in a company charges another division for goods and services.

  • 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.
  • FTP remains 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.

FTP Methods

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 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.

Charting Funds Transfer Pricing

FTP charting is a part of all methodologies with charts representing the pooled data across assets and liabilities. In general, it charts the association between yield-to-maturity 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.

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

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.

According to Moody's, as of 2019, 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.