Funds Transfer Pricing (FTP)
Candlefocus EditorThe multi-rate method of FTP considers various deposit prices that are product specific, such as checking accounts and certificates of deposit (CDs), and assigns an associated interest rate to each rate. This type of analysis is typically used in a financial institution’s annual budgeting cycle for product pricing and return on investment (ROI) reporting. In the single-rate method, each of the specific customer deposits is assigned a single interest rate that is used to assess the profitability of the total portfolio. It is typically used to distinguish the cost of wholesale funding from retail deposits.
Despite its usefulness to firms in assessing the cost of funding, most global regulators have not incorporated FTP analysis into their comprehensive bank regulatory reporting. However, it is up to each institution to decide how to implement FTP in order to best comply with local and international regulations.
There are a number of regulatory guidelines available on how to conduct an FTP process in order to maximize efficiency and compliance. Generally speaking, these guidelines suggest instituting an FTP process that is consistent with the institution’s basis of financing, as well as recognizing the various elements of interest rate risk, liquidity risk, and solvency risk that are embedded in any FTP system.
Overall, FTP is a powerful and effective tool for financial institutions to properly monitor their profitability as a result of their funding sources and loan structures. While it is not a regulatory requirement, there are several industry-wide best practices for implementing an FTP program that balance the costs and benefits of each funding source, allowing financial firms to make sound business decisions.