Funds transfer pricing
Banking - internal transfer pricing.
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.