# Funds Transfer Pricing: Calculation & Impact on Profitability

![Funds Transfer Pricing (FTP): A method used to measure how funding adds to a company's overall profitability.](https://www.investopedia.com/thmb/iGE0TXzhugYZIxN0OfCs1M0GXN8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Ftp_final-f3cce5bddbb44078871b4a221d900ce4.png)

*— Investopedia / Michela Buttignol*

## What Is Funds Transfer Pricing (FTP)?

Funds Transfer Pricing (FTP) is a significant tool used by financial institutions. FTP is most commonly used in the banking industry to help financial institutions internally analyze their strengths and weaknesses, as well as to assess the profitability of a company's funding sources.

Funds transfer pricing also is used to help companies determine the profitability of their various [product lines](https://www.investopedia.com/terms/p/product-line.asp), the performance of branch outlets, and the effectiveness of various business processes.

There are two common FTP methods: single-rate, which provides a view of assets vs. liabilities; and multi-rate, which provides a more granular, defined view by breaking assets and liabilities into groups.

### Key Takeaways

*   Funds transfer pricing (FTP) is critical for banks to assess the profitability of different business units, including product lines and customer relationships, by involving both assets and liabilities in its analysis.
*   Implementing FTP helps banks avoid the risks of mispricing products and services and can prevent increased business unit volatility due to liquidity and other risks.
*   FTP methodologies, like single-rate and multi-rate systems, allow financial institutions to evaluate risk and profitability with varying levels of granularity, aiding in better business decision-making.
*   By utilizing FTP, financial institutions can better determine the economic viability of individual branches, which may lead to strategic decisions like branch closures or resource reallocations.

## Understanding the Mechanics of Funds Transfer Pricing (FTP)

Funds transfer pricing is an important reporting [metric](https://www.investopedia.com/terms/m/metrics.asp) that is used in banking management analysis and reporting. Financial institutions use it as a way to measure their overall profitability as well as the profitability of segments of the business, such as product offerings and customer relationships. They can use it to determine whether individual branches are economically viable.

The basis of FTP is that financial institutions should benefit from both of their most basic activities: lending and [deposits](https://www.investopedia.com/terms/d/deposit.asp). According to Moody's, a well-designed FTP system will have a bank's Treasury department "buy funds from the liability business unit and then sell those funds to the asset business unit at a rate that balances both the deposit and lending activity areas." As such, FTP requires the pooling of information across assets and liabilities.

It is also analyzed in conjunction with [asset/liability management](https://www.investopedia.com/terms/a/asset-liabilitymanagement.asp). FTP may also be evaluated alongside other metrics such as net income or [net interest margin](https://www.investopedia.com/terms/n/netinterestmargin.asp) (NIM), which is the difference between a financial institution's income and interest expenses.

### The Essential Role of FTP Protocols in Banks

There is a great deal of [risk](https://www.investopedia.com/terms/r/risk.asp) involved for financial institutions that don't implement FTP protocols within their operations. Some of these issues are:

*   Mispricing of products and services, resulting in losses
*   Business unit [volatility](https://www.investopedia.com/articles/financial-theory/08/volatility.asp) as a result of liquidity and other risks that aren't hedged or transferred
*   Lack of clarity on the real [margins](https://www.investopedia.com/terms/m/margin.asp) of products and services  
    

> **Important**
>
> Funds transfer pricing is different from transfer pricing, which is an accounting practice that represents the implied prices that one division in a company charges another division for goods and services.

## Discovering Funds Transfer Pricing (FTP) Methodologies

A variety of methodologies for FTP are used in the banking industry. Two of the most basic methods are:

*   Single-rate FTP, which provides a comprehensive view of assets versus liabilities by [maturity](https://www.investopedia.com/terms/m/maturity.asp). With the single-rate method, all assets and liabilities are assigned a single transfer rate regardless of the nature of the product.
*   Multi-rate FTP, which breaks assets and liabilities into groups based on selected characteristics. This gives management a more granular view of risks.

The multi-rate methodology is often used for product and maturity breakouts. In these breakouts, some of the more granular details of consideration may also include the funding liquidity spread, the contingent liquidity spread, the credit spread, the option spread, and the basis spread.

Charting is a key part of all FTP methodologies. Charting represents the pooled data across assets and liabilities. In general, it provides a visual picture of the association between [yield-to-maturity](https://www.investopedia.com/terms/y/yieldtomaturity.asp) (YTM) and time-to-maturity.

Charting can be customized based on methodology and report requirements. Internally, financial institutions will have an interface that includes all of the high-level FTP metrics they are following.  

> **Fast Fact**
>
> Most global regulators have not incorporated FTP analysis into comprehensive bank regulatory reporting.

## Real-World Example of Funds Transfer Pricing (FTP) in Action

Many banks use FTP charting to analyze funding by location. Management uses FTP to assess the profitability of funds at different divisions. This analysis considers each branch's deposits, loan amounts, and customer numbers.

If a particular arm is continuously [underperforming](https://www.investopedia.com/terms/u/underperform.asp) established baselines or reporting significant declines, it can lead to a branch closure. If a branch closes, it will typically transfer accounts and resources to another nearby location.

Since the [2007-2008 financial crisis](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp), the [Dodd-Frank Act](https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp) has focused on boosting liquid capital levels to cut risk in big banks. FTP analysis has attracted more attention from bank managers, though guidance remains informal rather than mandated.

Moody's notes that the Federal Reserve's SR16-3 letter is a key regulatory precedent for FTP best practices.

## Why Is Funds Transfer Pricing an Important Tool for Banks?

Funds transfer pricing is used by financial institutions to help them determine whether their business is profitable. They also use this tool to evaluate the profitability of different parts of their companies, including product offerings.

Not having a system like this in place can lead to mispricing of products and services, and can increase the risk of volatility.

## What Is the Difference Between Single-Rate and Multi-Rate FTP?

Single-rate and multi-rate funds transfer pricing are two different methodologies used by financial institutions in the banking industry.

Single-rate FTP allows banks to take a comprehensive look at their assets compared to their liabilities. Under this method, all assets and liabilities are given a single transfer rate.

Multi-rate FTP divides assets and liabilities into groups based on their characteristics. This gives the company's management a more detailed look at the risks involved with each group.

## How Do Banks Earn Profits?

Banks earn profits from a variety of sources. The main drivers are the fees and service charges they impose on their customers. Interest earned for loans and other credit products also produce income for banks.

## The Bottom Line

Companies use funds transfer pricing to assess their overall success and the success of individual business units, products, and services. FTP is essential in mitigating risks such as mispricing or volatility in banking. Many FTP methods exist, but the most common are single- and multi-rate.

FTP is not mandated by law or well-regulated, but it has become a popular tool since the 2008 financial crisis.

> **Article Sources**
>
> 1.  Moody's Analytics. "[Do Funds Transfer Pricing Methodologies Still Work with Excess Deposits?](https://www.moodysanalytics.com/articles/2021/funds-transfer-pricing-methodologies)"
>     
> 2.  KPMG. "[Fund Transfer Pricing](https://assets.kpmg.com/content/dam/kpmg/rs/pdf/2018/01/rs-Fund-Transfer-Pricing.pdf)," Page 7.
>     
> 3.  Board of Governors of the Federal Reserve System. "[SR 16-3: Interagency Guidance on Funds Transfer Pricing Related to Funding and Contingent Liquidity Risks](https://www.federalreserve.gov/supervisionreg/srletters/sr1603.htm)."
>     
> 4.  Moody's Analytics. "[Funds-transfer-pricing in Banks: what are the main drivers?](https://www.moodysanalytics.com/-/media/whitepaper/2018/funds-transfer-pricing-in-banks.pdf)"