Funds Transfer Pricing (FTP)

A bank has businesses that gather deposits and businesses that lend or commit funds, and both contribute to the funding position. Without an internal allocation, a loan team may appear highly profitable while the cost of obtaining and managing its funding remains elsewhere in the organisation.

An FTP framework can charge the lending activity for the funds it uses and credit the deposit activity for the funding it supplies, while a central treasury function manages the resulting balance-sheet exposure. These internal allocations help distinguish product performance from risks managed across the bank.

The customer's interest rate remains a separate figure: a loan might earn 7% while its internal funding charge is 4%, and the difference is a starting contribution margin, not final profit, because credit losses, operating costs, capital requirements and other expenses still need consideration. Deposits can create a funding benefit without being costless, since the bank pays interest, operates accounts and faces the possibility of withdrawals.

An FTP credit should therefore reflect the product's characteristics instead of treating every deposit balance as equally stable funding. Time matters too: a long-term fixed-rate loan and a short-term deposit have different cash-flow and repricing patterns, and using one simple rate for both can conceal maturity differences and create misleading incentives for the business units involved.

A single-rate method uses a common transfer rate across the selected positions; it is simple to explain but can obscure important differences. More detailed methods assign rates or components according to characteristics such as maturity, repricing and liquidity needs.

Funding risk and contingent liquidity risk deserve separate attention, because an undrawn credit commitment may require little cash today but create a need for cash if the customer draws it later, and ignoring that can shift the future funding burden to treasury. The Federal Reserve's interagency guidance describes FTP as a tool for measuring risk-adjusted profitability and centralising funding and contingent liquidity risk management, with a purpose that includes aligning business incentives with the firm's risk appetite.

The guidance applies to specified large institutions, not automatically to every business in the world. A product's internal profitability can influence pricing and growth decisions, so if the transfer charge omits liquidity costs, a team may expand an activity that looks profitable locally but weakens the bank's overall position.

Better allocation exposes the cost without assuming that every low-margin activity must be closed. FTP is different from ordinary transfer pricing for goods or services between divisions or group companies, since bank FTP focuses on funds and associated financial risks and should not be confused with tax rules governing cross-border related-party transactions.

For a non-finance manager, ask whether the product margin includes a realistic funding charge, review the transfer-rate assumptions before comparing branches or product teams, and remember that a tidy internal profit figure can still depend on a funding model that assigns costs to someone else.