how funds transfer pricing ftp works
funds transfer pricing is an important reporting metric that is used in banking management analysis and reporting financial institutions use this tool as a way to measure their overall profitability as well as the profitability of different segments of their business such as product offerings and customer relationships they can also determine whether keeping certain branches open is economically viable the basis of ftp is that financial institutions should benefit from both of their most basic activities lending and deposits according to moody s an ftp system that is well designed will have a bank s treasury department buy funds from the liability business unit and then sell those funds to the asset business unit at a rate that balances both the deposit and lending activity areas 1 as such ftp requires the pooling of information across assets and liabilities it is also analyzed in conjunction with asset liability management ftp may also be evaluated alongside other metrics such as net income or net interest margin nim which is the difference between a financial institution s income and interest expenses there is a great deal of risk involved if financial institutions that don t implement ftp protocols within their operations some of these issues include note that this isn t an exhaustive list funds transfer pricing is different from transfer pricing which is an accounting practice that represents the implied prices that one division in a company charges another division for goods and services funds transfer pricing ftp methodologiesthere are a variety of methodologies for ftp used in the banking industry two of the most basic methods include 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 is a key part of all ftp methodologies charting represents the pooled data across assets and liabilities in general it provides a visual picture of the association between yield to maturity ytm 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 most global regulators have not incorporated ftp analysis into comprehensive bank regulatory reporting example of funds transfer pricing ftp many banks use ftp charting to analyze funding by location 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 2007 2008 financial crisis the u s government s dodd frank act 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 from bank managers as well but guidance has been more informally introduced rather than mandated according to moody s 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 34