What fund transfer pricing?
Fund transfer pricing used to calculate how the funding is added to the overall profit of the company. It is the most used ratio in the banking industry where the financial institution uses it to analyze the positive and negative of the firm. The fund transfer pricing is also used to analyze the profit of various products of the bank, the performance of branches of banks, outlets, and effectiveness. The fund transfer pricing is different from the pricing. It is the accounting process used to calculate the number of charges used by one division of bank for the other division as the service tax. The use of FTP is to find how the funding is useful for the overall profitability of the firm. But of international regulators have not calculated the FTP analysis in the compressive bank regulatory reports. FTP has importance for the internal analysis of the regulatory guidelines for industry practices. The single rate and multi-rate are two main methods for the internal FTP analysis.
What is the importance of Fund transfer pricing?
Fund transfer pricing is useful in case of the economic turbulence and banking crisis. The implementation of the BASEL 3 regulation around the bank has kept the pressure on the bank to maintain the buffer of liquidity.
What are the different FTP methods?
FTP is a method used for bank management analysis and report generation. It requires the collection of information from assets and liabilities. It is calculated with other factors such as net income and net interest margin. A variety of FTP use in the bank industry.
1. single-rate method:-
In the single rate method is the compressive view of assets vs liabilities with parameter maturity. In the single-rate method, all assets and liabilities are assigned with the transfer rate regarding the style or type of product.
2. Multi-rate method:-
The multi-rate method breaks the assets and liabilities into different groups based on selected characteristics. By using a multi-rate method the management has a very high level of understanding of risk. The multi-rate methodology is used for the product and maturity breakouts. It also includes the funding liquidity spread, contingent liquidity spread, credit spread, option spread, and basis spread.
How to chart the fund’s transfer pricing?
The chart preparation is part of all methodologies with the representation of pooled data across the assets and liabilities. The chart is the relation between yield maturity and time maturity. The FTP chart is used for the methodology and reporting requirements. Chart preparation is customized with the methodology and report requirement. The financial institution has an interface to ensure that they are following the high-level FTP metrics.
How FTP useful for the price risk?
FTP is used for risk management in the area like credit risk, optional risk, liquidity risk, and interest rate risk. The need for the FTP framework has been raised from the year 2007 after the crisis when it is difficult to ignore the risk management with the FTP framework. The interest rate risk and liquidity risk are the two forms of TLP term liquidity premium. These are the two types where the term FTP framework is used.
How to use FTP for the price regulation cost into the product?
Most of the bank uses FTP for the analysis of the internal risk assessment by directly linking with the pricing of regulatory cost. The regulations are working for both types means higher cost and lower cost products.
How to use the FTP for the particular product?
For a particular product, the FTP is used as an alternate business unit of revenue. The use of both risks based and incentive-based can be challenging for a product. The FTP software cannot be used to split the risks and incentives into two levels.
How FTP works for loans?
In the case of a loan, the bank has a loan amount in the form of interest rate but not the cost of funding. The reason behind these is simple that the bank uses several sources of funds for financial assets like deposits, savings, time, corporate, interbank, subordinated deposit, and equity. Hence there is a need for specific fund transfer prices to evaluate the cost of funding loans.
How FTP used to manage the risk and increase profitability?
The bank accepts a loan from the capital market or the end clients through the day to day financial activities. The income of the bank is calculated with the credit given to the payoff paid for the funds received. To allocate the loans and deposits, banks are using the FTP methodologies. Due to FTP, the revenue collected gets distributed easily. The FTP method is used to manage the three types of risk as credit, liquidity, and market risk. The modern FTP method ensures maximum efficiency and minimum risk.
FTP or fund transfer pricing is the tool used for the balance sheet. The FTP framework is used by banks for pure risk-based pricing and augmentation for business incentives or subsidies. It is a useful tool to deal with the risk components and implementing policy.