Funds Transfer Pricing in the New Normal

Robert Schäfer, Pascal Vogt and Peter Neu

Funds transfer pricing (FTP) is a term used to describe the sum of policies and methodologies a bank applies in its internal steering systems to charge for the use (and credit the generation of) funding and liquidity. Commonly, FTP is embedded in economic value added (EVA) or return on equity (ROE), return on risk-adjusted capital (RORAC) performance measures of single transaction or a business line’s risk-adjusted profitability or performance as a complement to capital consumption. It focuses on distributing the bank’s funding and liquidity costs to the beneficiaries of these scarce and valuable resources. As such, FTP is an extremely powerful tool, which is deeply rooted in any divisional profit and loss (P&L) or profit centre calculation. In fact, FTP is the means by which a bank’s overall net interest income can be split into originating units and subunits, thus enabling the bank’s management to perform an effective planning, monitoring and control cycle. As a consequence of the 2007–9 global financial crisis these costs are material and need to be allocated. They can turn a business line’s performance or product’s profitability from positive to negative and vice versa. Thus