Question 1

What is the difference between funds transfer pricing and transfer pricing?

Accepted Answer

The difference between funds transfer pricing and transfer pricing is that transfer pricing, in the general corporate sense, refers to the prices set for transactions between related legal entities, typically for tax purposes. Funds transfer pricing is specific to banks and financial institutions. It is the mechanism for pricing the internal flow of funds between business units within a single legal entity or group. FTP has no direct tax purpose; its purpose is management accounting accuracy and interest rate risk attribution.

Question 2

Why is matched maturity FTP considered the gold standard?

Accepted Answer

Matched maturity FTP is considered the gold standard because matched maturity FTP is the only methodology that completely isolates interest rate risk in treasury. When every asset and liability is funded at its specific maturity tenor, business unit margins reflect only credit spread and pricing discipline, with no contamination from duration mismatches. Other methodologies allow cross-subsidization between long- and short-duration products, which distorts profitability reporting and creates pricing incentives that do not reflect the bank’s actual economics.

Question 3

How often should FTP rates be updated?

Accepted Answer

FTP rates should be updated according to the type of instrument. For fixed-rate instruments, the FTP rate is typically locked at origination and held for the life of the instrument. For variable-rate instruments, the rate is updated at each contractual repricing date. The FTP curve itself should be reviewed monthly at minimum, with intra-month updates when market conditions shift materially. Behavioral maturity assumptions should be validated at least annually against observed deposit behavior.

Question 4

Can FTP be implemented in an Excel spreadsheet?

Accepted Answer

FTP can be implemented in a spreadsheet in certain circumstances. A basic single-rate or two-bucket FTP model can be implemented in a spreadsheet for small, simple balance sheets. Matched maturity FTP at any meaningful scale cannot. The combination of instrument-level data volumes, curve management, version control requirements, audit trail obligations, and scenario modeling capability exceeds what spreadsheet environments can provide reliably. Banks that run FTP in spreadsheets typically face the same problems: inconsistent methodology application across periods, no audit trail connecting outputs to inputs, and an inability to model rate scenarios quickly.

Question 5

How does FTP relate to net interest margin?

Accepted Answer

FTP relates to net interest margin in that FTP disaggregates the bank-wide net interest margin into unit-level contributions. At the aggregate level, the sum of all FTP charges and credits nets to zero within treasury: every charge paid by a lending unit corresponds to a credit paid to a liability unit or held by treasury. The bank’s NIM is the sum of business unit FTP-adjusted margins plus treasury’s own contribution from managing the residual interest rate risk. FTP does not change NIM; it allocates NIM to the business units responsible for generating it.

Question 6

How do non-maturity deposits affect funds transfer pricing in banking?

Accepted Answer

Non-maturity deposits affect funds transfer pricing in banking because they have no contractual maturity but often exhibit stable, long-duration behavior at the aggregate level. The behavioral maturity assumption, which estimates the effective duration of the stable portion of these deposits, is one of the most consequential inputs in an FTP model. If a bank assigns demand deposits a short behavioral maturity, those deposits receive a lower FTP credit. If the bank assigns a longer behavioral maturity based on historical runoff analysis, the deposit franchise's contribution increases substantially. These assumptions require historical data analysis, periodic validation, and formal documentation.

Cornelis Scheltinga

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