fund transfer pricing

A system for determining the cost of internal transfers for a single transaction or single relationship.

Traditional approaches to Fund Transfer Pricing are based on simplified methods that do not correctly assess the risk transfer cost.

Instead, a system of multiple Fund Transfer Pricing firmly based on a financial logic can determine the cost of internal transfers for the individual transactions and relationships. This is done in accordance with the specific financial characteristics and the allocation rules for each risk/yield component, such as:

  • capital rates and monetary market rates;
  • awards for basis risk and implicit & explicit options;
  • behavioural dynamics due to different types of counterparties (usually retail), in particular for demand deposits and loans subject to early redemption;
  • cost of liquidity drawn from country risk and credit risk of individual credit institutions;
  • other funding costs from minimum reserve thresholds, taxes, etc.

The ERMAS™ FTP (Enterprise Risk MAnagement System) module is composed of two mutually dependent tools:

  • the Ex-Ante FTP module determines the benchmark rates for standard instrument types that are typically defined in the commercial network’s product catalogue;
  • the Ex-Post FTP module calculates the internal transfer rates of actual operations, in order to itemise them in the commercial network. The Ex-Post FTP module is powered by the input data flows already available for the other ERMAS™ Suite modules.
New Funds Transfer Price model
Within an environment characterised by significant changes in clients’ behaviour and in financial markets complexity, the Bank started a project to review its Funds Transfer Price model, aimed at identifying the contribution of each business unit to the interest margin, and properly allocating the cost of risk to the commercial products and services that generate the exposure, as required by the new regulatory requirements.

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