Bps and Funds transfer pricing: Difference between pages

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Basis points.
''Banking - internal transfer pricing''.


Often written ''bps''.
(FTP).


Funds transfer pricing deals with the internal transfer prices for funding, within a bank.


1.


''Interest rates''.
FTP methodologies are important because they affect a bank’s internal profit allocation, and thereby influence business lines’ activities and appetite for risk.


One hundredth of 1%
For example, if flaws in a bank's FTP lead to a lending unit's funding costs being underestimated, the lending unit may misprice loans to external customers and offer them too cheaply - and expand lending volumes - in the mistaken belief that this lending is profitable.


= 0.01%
This problem has happened in the past, when many banks over-expanded their lending. Among other problems, the banks based their lending units' funding costs on the low interest rates payable for short-term wholesale funding, without properly considering the risks.


= 0.0001 as a decimal.


The internal transfer prices for funding need to deal fully with liquidity, interest rate and currency risks, and the costs of hedging them.


For example, an increase of three basis points (0.03%) from a starting rate of 2%, would give an increased rate of 2.03%.
FTP is typically carried out by the bank's treasury.
 
 
One hundred basis points are 1%.
 
An increase of 3%, say from 2% to 5%, would be an increase of 300 basis points.
 
 
2.
 
While bond coupons may be expressed in fractions (for example, quarters, eighths or sixteenths), yields and prices of most money market instruments, such as commercial paper or treasury bills, are quoted in basis points.
 
 
3.
 
''Foreign exchange rates.''
 
One hundredth of a cent, for example $0.0001, or its equivalent in other currencies.
Often, but not always, this represents a minimum price movement in the related foreign exchange rate quotation.




== See also ==
== See also ==
* [[Commercial paper]]
* [[Funding]]
* [[Constant net asset value]]
* [[Funding risk]]
* [[G+]]
* [[Hedging]]
* [[Percentage point]]
* [[Interest rate risk]]
* [[Pip]]
* [[Interest Rate Risk in the Banking Book]] (IRRBB)
* [[Price value of a basis point]]
* [[Liquidity]]
* [[Liquidity risk]]
* [[Transfer price]]
* [[Treasury]]

Revision as of 09:10, 24 June 2022

Banking - internal transfer pricing.

(FTP).

Funds transfer pricing deals with the internal transfer prices for funding, within a bank.


FTP methodologies are important because they affect a bank’s internal profit allocation, and thereby influence business lines’ activities and appetite for risk.

For example, if flaws in a bank's FTP lead to a lending unit's funding costs being underestimated, the lending unit may misprice loans to external customers and offer them too cheaply - and expand lending volumes - in the mistaken belief that this lending is profitable.

This problem has happened in the past, when many banks over-expanded their lending. Among other problems, the banks based their lending units' funding costs on the low interest rates payable for short-term wholesale funding, without properly considering the risks.


The internal transfer prices for funding need to deal fully with liquidity, interest rate and currency risks, and the costs of hedging them.

FTP is typically carried out by the bank's treasury.


See also

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