Funds transfer pricing (“FTP”) is both a regulatory requirement and an important instrument for at least managing the bank’s internal market for liquidity, their interest rate and FX position. From the strategic point of view, FTP can be used to impact the balance sheet structure directly. It is the gateway to managing the bank within the bank. Rolling out an FTP mechanism enables product pricing and profitability management, while also addressing the impact of liquidity and interest rate risk separately on the balance sheet.

Deploy a better FTP framework

For Funds Transfer Pricing to be effective, business unit level incentives created through the framework must be aligned with the firm’s overall goals. However, designing a framework that achieves this can be challenging, especially in cases where the specification of the FTP methodology requires significant judgment or deals with inherent uncertainty or complexity.

Banks can often struggle to select the most appropriate methodology given the lack of a clear industry standard. The exhibit below highlights three examples with significant divergence in industry practice, where methodology selection should be guided by which option promotes the institution’s desired strategic objectives. For example, re-visiting the cost of funds curve specification will be a critical step in the coming year given the industry transition away from LIBOR.

• Extensive experience in FTP design for leading banks by our international consultants
• Providing active support and taking a leading role in discussions/alignment with management
• Feasibility checks of an elaborated FTP system and implementation timeline
• Providing clear focus on all relevant dimensions and critical success factors
• Coordination of different project streams, keeping the big picture in mind
• Critical evaluation of results with regard to internal and external regulatory requirements
• Proven gap analysis: Analyzing the target as well as the current status of FTP systems
• An integral perspective linking the strategic component of FTP with its hands-on operational duties at business
• Compliance regarding new regulatory requirements – FTP Audit
• Further development regarding modeling and causerelated allocation of liquidity costs, utilities and risks (modeling of deposits and allocation, collateral allocation and liquidity options)
• Process for the computation and updating of liquidity cost curves (e.g. overlapping durations, input data, etc.)
• Validation of FTP methodology
• Integration of FTP in Liquidity/Funding Management and Holistic Bank Management