What is the money transfer price – FTP?
The price of money transfer (FTP) is a system used to estimate how financing adds to the overall profitability of a business. FTP sees its most important use in the banking sector. Financial institutions use the FTP protocol to analyze the strengths and weaknesses of the business within the institution. Fund transfer prices can also help to determine the profitability of the different product ranges offered by the bank, the performance of branches and to judge the efficiency of the processes.
FTP is an important reporting measure used in analysis and reporting of bank management. It requires the pooling of information between assets and liabilities. Generally, it is also analyzed in conjunction with asset / liability management. In addition, it can be assessed alongside other parameters, such as net income or net interest margin.
There are a variety of methodologies for FTP used in the banking sector. According to Deloitte, two of the most basic methods include the single rate and the multiple rate. The single rate offers a complete view of assets versus liabilities by maturity. With the single rate method, all assets and liabilities are assigned a single transfer rate regardless of the nature of the product.
The multiple rate method divides assets and liabilities into additional groups based on selected characteristics. With the multi-rate method, management has a more granular view of risks. The multiple rate methodology is often used for product and maturity breakdowns. In these developments, some of the more specific details to consider may also include the funding liquidity gap, the potential liquidity gap, the credit spread, the options spread and the basic spread .
- FTP is a method used to measure the contribution of financing to the overall profitability of a business.
- Most global regulators have not incorporated FTP analysis into comprehensive bank regulatory reports.
- FTP remains an important measure for internal analysis with several regulatory guidelines provided for industry best practices.
- The single rate and multiple rate methods provide two basic systems for internal FTP analysis.
Fund transfer pricing pricing
FTP mapping is part of all methodologies with graphs representing the data grouped between assets and liabilities. In general, it presents the association between the yield to maturity and the time to maturity. Charts can be customized based on methodology and reporting requirements. Internally, financial institutions will have an interface that includes all of the high-level FTP metrics they track.
Example from the real world
Many banks use FTP mapping to analyze funding by location. In this example, bank management would use FTP to determine the profitability of the funds in each division. This analysis takes into account the deposits made by each agency, the amount of loans, as well as the number of clients served. If a particular arm is consistently below established benchmarks or reports significant declines, this can lead to a branch closure decision. If a branch closes, it usually transfers accounts and resources to another nearby location.
Since the 2008 financial crisis, the government’s Dodd-Frank Reform Act has focused primarily on increasing the regulated level of liquid capital to reduce risk at the largest banks. Fund transfer pricing analysis has also caught the attention of bank managers, but guidance has been introduced more informally rather than mandatory.
According to Moody’s, in 2019, some of the main regulatory precedents for best practices in money transfer pricing include those created by the US Federal Reserve letter SR16-3.