Funds Transfer Pricing

Why FTP Matters for Banks and Financial Institutions

• Measures true business line performance
• FTP separates interest income/expense driven by market rates from spreads earned by business units, revealing their real profitability.
 
• • Enables risk-adjusted pricing
• Correctly assigning funding costs and liquidity premiums ensures loans and deposits are priced to reflect risk, maturity, and liquidity requirements.
• • Supports regulatory compliance
• Basel III and other prudential standards require transparent interest rate risk and liquidity risk measurement—FTP frameworks help meet these expectations.
• • Improves capital allocation
• By assigning appropriate funding charges and credits, FTP guides resource allocation toward the most profitable and strategically aligned activities.
• • Drives strategic decision-making
• Clear, consistent internal pricing improves product mix, branch performance evaluation, and incentive alignment across the institution.

Funds Curve Development

Creating internal transfer pricing curves for different maturities, currencies, and liquidity
profiles—reflecting both market and institution-specific conditions.

Matched Maturity Methodology

Assigning funding rates based on the repricing and liquidity profile of each product, ensuring
fairness and accuracy.

Liquidity Premium & Optionality Adjustments

Incorporating costs for maintaining liquidity buffers and customer behavior assumptions
(e.g., early withdrawals, prepayments).

Risk-Adjusted Performance Measurement

Integrating FTP into profitability reporting to separate the effect of funding, credit,
operational, and market risks.

Integration with ALM & Planning

Linking FTP outputs with Asset-Liability Management (ALM), budgeting, and strategic
planning processes.

Our Advisory Approach

1. Reviewing your existing FTP methodology, data quality, system capabilities, and regulatory alignment.

2. Selecting the most suitable approach—pooled, matched maturity, or hybrid—based on product mix and strategic objectives.

3. Designing robust internal transfer pricing curves with market rate inputs, liquidity spreads, and behavioral assumptions.

4. Embedding FTP logic into your MIS/BI tools, ALM systems, or core banking software for automated monthly processing.

5. Running back-testing, sensitivity analysis, and reconciliation to ensure accuracy and consistency.

6. Equipping your finance and risk teams with the knowledge to maintain, monitor, and continuously improve the FTP framework.