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White Paper

The 'What', 'Why' and 'How' of Fund Transfer Pricing in Commercial Banking

 

 

Fund Transfer pricing (FTP) helps transfer credit risk, interest rate risk, liquidity risk, and currency risk to an intermediary (the treasury in case of a bank), and ensures that both fund raising and advancing units function independent of market movements in interest rates.

 

Benefits

  • A robust fund transfer mechanism will help financial firms realize the following benefits:
  • Profitability management through a centrally controlled NIM, cost of funds, and targets for fee-based and fund-based income
  • Accurate product pricing through a risk-adjusted pricing mechanism, market benchmarks, and a differential product pricing method
  • Robust liquidity management due to centralized funding
  • Effective balance sheet management through central control of interest rate risk, liquidity risk, and risk-based capital allocation

Challenges

The implementation of the transfer pricing mechanism is not an easy task. A key challenge is the determination of the transfer price, especially when future cash flows are uncertain. Since all assets and liabilities have to be transfer priced, items such as demand deposits without fixed maturity, loans with prepayment options, and callable or puttable bonds and loans with cap or floor on rates, make transfer pricing a complex process. 

Download this pdf to know how banking and financial firms can benefit from a robust FTP mechanism.



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