Funds Transfer Pricing (FTP)

Key takeaways
* FTP is an internal pricing framework banks use to allocate funding costs and interest income between liability and asset business units, enabling assessment of product, branch, and unit profitability.
* Common methodologies are single-rate (one transfer rate) and multi-rate (rates by product/maturity/risk factors), with multi-rate offering greater granularity.
* Proper FTP helps avoid mispriced products, clarify true margins, and attribute liquidity and credit costs; weak or absent FTP increases volatility and hidden losses.
* FTP is widely used but not universally mandated; regulatory guidance (e.g., the Fed’s SR 16-3) outlines best practices.

What is FTP?

Funds Transfer Pricing (FTP) is an internal tool used by banks and other financial institutions to measure and allocate the economic costs and benefits of funding. It attributes the cost of deposits and other funding sources to lending and investment activities, helping management evaluate:
* Product-line profitability
* Branch or business-unit performance
* Pricing decisions and incentive structures
* Liquidity and funding risk allocation

FTP connects treasury, asset, and liability units by treating treasury as an internal intermediary that “buys” funds from liability units and “sells” them to asset units at internally set transfer rates.

How FTP works (mechanics)

• Pool assets and liabilities to produce a consistent funding curve and transfer rates.
• Treasury sets transfer rates that reflect funding costs, liquidity premiums, and risk spreads; those rates are applied to business units to charge or credit funding.
• FTP outputs are analyzed alongside other metrics such as net interest margin (NIM) and net income, and support asset/liability management (ALM) decisions.
• Outputs are typically presented in charts linking yield-to-maturity and time-to-maturity, plus dashboards of key FTP metrics.

Why FTP matters

Without a robust FTP framework, banks risk:
* Mispricing products and services, eroding margins
* Unhedged liquidity exposures that increase business-unit volatility
* Poor capital and resource allocation due to unclear economic contributions of units

FTP translates liquidity and funding costs into unit-level economics, facilitating more informed pricing, capital allocation, and strategic choices (for example, whether a branch is viable).

FTP methodologies

Two primary approaches:

Single-rate FTP
* Applies a single transfer rate across assets and liabilities (often based on an aggregate funding curve).
* Simple and easier to administer.
* Best for high-level profitability views but may mask product- or maturity-specific risks.

Multi-rate FTP
* Assigns different transfer rates by product, maturity bucket, or risk characteristics.
* Incorporates spreads for funding liquidity, contingent liquidity, credit, optionality, and basis differences.
* More granular and better for pricing, product profitability analysis, and risk attribution.

Charting and analytics
* Both methods rely on pooled data and visualizations (e.g., yield-to-maturity vs. time-to-maturity) to support reporting and decision-making.
* Internal interfaces typically present FTP rates, spreads, and allocation results for management review.

Example in practice

Banks commonly use FTP to evaluate branch-level profitability by allocating funding costs from local deposits to local lending. Persistent underperformance relative to FTP-based baselines can prompt management actions such as repricing, reallocating resources, or closing a branch and migrating accounts.

Since the 2007–2008 financial crisis, attention to liquidity and FTP has increased. Regulatory guidance (notably the Federal Reserve’s SR 16‑3) outlines best practices for linking FTP to funding and contingent liquidity risk, though FTP is not uniformly required in regulatory reports.

Practical benefits

• More accurate product pricing that reflects full funding and liquidity costs
• Transparent performance measurement across units and products
• Better liquidity risk attribution and contingency planning
• Improved capital allocation and strategic decision-making

Common questions

What’s the difference between single-rate and multi-rate FTP?
* Single-rate uses one transfer rate for all books; multi-rate uses differentiated rates by tenor, product, or risk characteristics, offering more granularity.

Is FTP required by regulators?
* FTP itself is not universally mandated, but regulators encourage robust FTP practices as part of liquidity and ALM governance. SR 16‑3 is a key U.S. supervisory reference.

How do banks earn profit in this context?
* Banks earn net interest income (interest on loans minus interest paid on deposits) and fee income. FTP helps allocate interest costs accurately so unit-level profitability reflects economic reality.

Bottom line

Funds Transfer Pricing is a foundational internal tool for banks to allocate funding costs, measure profitability, manage liquidity risk, and inform pricing and strategic decisions. Choosing between single- and multi-rate approaches depends on the institution’s complexity and the level of granularity required. Robust FTP governance improves transparency and reduces the chance of mispricing and unmanaged liquidity exposures.

Sources

• Moody’s Analytics — studies on FTP drivers and methodology
• KPMG — fund transfer pricing guidance
• Board of Governors of the Federal Reserve System — SR 16‑3: Interagency Guidance on Funds Transfer Pricing Related to Funding and Contingent Liquidity Risks