Funds Transfer Pricing (FTP)

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 huge use in the banking industry where financial institutions use FTP as a method for breaking down the strengths and shortfalls of the firm inside the institution. Funds transfer pricing may likewise assist with deciding the profitability of different product lines the bank offers, the performance of branch outlets, and judge the adequacy of processes.

Note that FTP is unique in relation to transfer pricing, an accounting practice that addresses the implied prices that one division in a company charges one more division for goods and services.

• FTP is a method used to measure how funding is adding to overall profitability for a firm.
• Most global regulators have not incorporated FTP analysis into complete bank regulatory reporting.
• FTP stays an important measurement for internal analysis with several regulatory guidelines accommodated industry best practices.
• The single-rate and multi-rate methods give two essential systems to internal FTP analysis.

FTP Methods

FTP is an important reporting metric utilized in banking management analysis and reporting. It requires the pooling of data across assets and liabilities. Normally, it is likewise examined related to asset/liability management. Moreover, it could be assessed alongside different metrics, like net income or net interest margin.

There are different methodologies for FTP utilized in the banking industry. Two of the most essential methods incorporate single-rate and multi-rate. Single-rate gives an exhaustive perspective on assets versus liabilities by maturity. With the single-rate method, all assets and liabilities are assigned a single transfer rate no matter what the idea of the product.

The multi-rate method breaks assets and liabilities into extra gatherings in view of chosen characteristics. With the multi-rate method, management has a more granular perspective on risks. The multi-rate methodology is frequently for product and maturity breakouts. In these breakouts, a portion of the more granular subtleties of consideration may likewise incorporate 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 addressing the pooled data across assets and liabilities. By and large, it charts the association between yield-to-maturity and time-to-maturity. Charting can be redone in view of methodology and report requirements. Internally, financial institutions will have an interface that incorporates the undeniable level FTP metrics they are all following.

Certifiable Example

Many banks use FTP charting to investigate funding by location. In this model, bank management would utilize FTP to decide the profitability of funds at individual divisions. This analysis considers the deposits each branch acquires, the amount gave as loans, as well as the number of customers the location serves. On the off chance that a particular arm is ceaselessly failing to meet expectations laid out baselines or reporting huge declines, then it can lead to a branch closure decision. On the off chance that a branch closes, it will regularly transfer accounts and resources to another close by location.

Since the 2008 Financial Crisis, the public authority's Dodd-Frank Reform Act has basically centered around expanding the regulated level of liquid capital to assist with lessening risk across the biggest banks. Funds transfer pricing analysis has acquired increased consideration by bank managers also, yet guidance has been more casually presented as opposed to commanded.

As indicated by Moody's, starting around 2019, a portion of the leading regulatory points of reference for funds transfer pricing best practices incorporate those made by the United States Federal Reserve's SR16-3 letter.